US Treasuries rally hard even as Fed hikes rates

The US central bank tightened policy but left its so-called 'dot-plot' graph largely unchanged, triggering a sharp rally in government bond markets.

As expected by economists, raising the target range for the Fed funds rate by 25 basis points to between 0.75% and 1.0%.

However, in a surprise move Minneapolis Fed president Neil Kashkari dissented from the rest of the Federal Open Market Committee, instead casting his ballot in favour of keeping the target range for the Fed funds rate unchanged.

As of 1807 GMT the yield on the benchmark 10-year US Treasury was down eight basis points to 2.53%. Meanwhile, the yield on the policy-sensitive two-year note was down five basis points at 1.33%.

That pushed gains in cable to 0.99% as of 1841 GMT at 1.2270.

In its policy statement, the Fed described job gains as "solid" and said inflation had moved close to the Committee's 2% longer-run objective, although it was aiming for a sustained rise to that level.

At its February policy meeting the FOMC said inflation was still below target.

Data released earlier in the session showed headline CPI running at 2.7% in February - its quickest pace in five years.

Rate-setters also bumped up their assessment of fixed asset investment, saying it had "firmed somewhat".

"Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments," the FOMC said.

Few changes to economic, interest rate forecasts

US rate-setters' median macroeconomic projections were completely unchanged from the forecasts they submitted at the central bank's meeting on 14 December, except for two minor variations.

First, the long-run estimate for the unemployment rate was lowered by one tenth of a percentage point from 4.8% to 4.7%. Second, the median 2019 forecast for the Fed funds rate - its main policy lever - was nudged up from 2.9% to 3.0%.

For Tom Stevenson, investment director for personal investing at Fidelity International, the Fed was "clearly erring on the side of caution".

Indeed, the median forecasts from the Fed's top officials for interest rates in 2017 and 2018 were kept at 1.4% and 2.1% each, implying the Fed believed two 25 basis point increases this year and three next year.

"The dot plot is pretty much unmoved but we do seem to have a bit more consensus around rates in 2019. Of note, Neel Kashkari didn't think rates should rise yet, which highlights there are still meaningful doubts about just how quickly and how far the Fed should raise rates in this cycle. This case is simply based on a lack of wage growth, which holds back inflation.

"The temptation to hike is being tempered by the fact that labour market slack (of which there is more than headline figures might suggest), means there is hardly any pressure on wages and that means inflation should be steady and unspectacular - certainly not worthy of aggressive hiking," said Neil Wilson, senior market analyst at ETX Capital.

Central tendency for rate hikes nudged higher

However, the so-called 'central tendency' for the Fed funds rate between 2017 and 2019 were revised modestly higher.

Thus, for 2017, the central tendency of the Fed's board members showed the presidents of its regional banks forecast that interest rates would be between 1.4% and 1.6%, up from the range of 1.1% to 1.6% seen in December, while in 2018 it was seen at between 2.1% and 2.9%, which was higher than the 1.9% to 2.6% seen before.

The central tendency excludes the three lowest and three highest contributions for each variable.

In 2019, the bottom end of the range forecast for the Fed funds rate was nudged higher from 2.4% to 2.6%, with the upper bound unchanged at 3.3%.