Asian shares mixed in muted trading ahead of US Fed meeting

Chairman Jerome Powell holding a press conference following a two day Federal Open Market Committee policy meeting in Washington US

Asian shares mixed in muted trading ahead of US Fed meeting

The Fed said that "the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter". Bloomberg data shows a zero percent chance the Fed raises rates this year and a 27.7% probability of a 25-basis-point cut. "Despite protestations to the contrary, it seems evident that the Fed is kowtowing to stock market reaction to the prospect of higher interest rates and increasing levels of political interference".

In its statement, the Fed laid out a plan for stemming the reduction of its balance sheet: In May, it will slow its monthly reductions in Treasurys from $30 billion to $15 billion and end the runoff altogether in September.

Beginning in October, the Fed will roll its maturing holdings of mortgage-backed securities into Treasuries, using a cap of $20bn per month.

The central bank intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of 30 billion USA dollars to 15 billion dollars beginning in May, according to the statement.

The downbeat forecast came despite a bullish Donald Trump boasting about the health of the United States economy.

The rate-setting Federal Open Market Committee is due to announce its latest decision at 1800 GMT, after which Fed Chairman Jerome Powell will face the news media. The Fed increased rates four times previous year and three times in 2017.

Market watchers have always been anticipating a steady increase in borrowing costs.

Yields have been falling steadily since November, as worries rose about a slowing global economy and traders subsequently made moves in anticipation of a more patient Fed.

The Australian dollar dipped 0.2 per cent to US$0.7071, as the country's bond yields extended their breakneck decline to multi-year lows on expectations of a rate cut in Australia. They see the slim down as akin to more interest rate increases.

All of which suggests that the Fed may recognize that it went too far after it met in December.

Fed funds futures last priced in about 30 percent chance of a rate cut in 2019, compared with nearly zero percent seen earlier this month.

Second, they will want to know more about the balance sheet. Direction today will be largely guided by the outcome of the fed meeting.

"There's one hike projected for 2020 but there's a long time between now and then and so the market is effectively taking the view that the Fed is done tightening".

That stance left investors fretting that the Fed seemed determined to keep tightening policy regardless of a weakening economic outlook, an issue addressed with the lower economic forecasts.

That view is supported by the CME Group, which tracks trading in futures contracts on the Fed's benchmark rate.

It was an aggressive downshift that likely will come as a shock to many economists who did not look for such a drastic change in outlook from the central bankers, who as recently as September expected to raise rates three times in 2019. The benchmark 10-year yield, which reflects investor sentiment about the overall health of the economy, fell by as much as 8 basis points to the lowest since January 2018 and was last at 2.539 percent.

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