Federal Reserve Preview: A Glass Half Empty?

The Federal Reserve is widely expected to leave monetary policy unchanged on 29 January, but with hints of economic softness amongst the equity market euphoria we continue to see risks skewed towards lower rather than higher interest rates later in 2020.

The Fed's quiet confidence

Back in late August all the talk was of a potential recession. Business surveys were softening, the yield curve had inverted and equities were looking vulnerable. Fast forward five months and three Fed rate cuts, a phase one trade deal and the Fed re-expanding its balance sheet have helped turn the situation round and pump equity markets to new all-time highs. Inflation is broadly in line with target and the unemployment rate remains at 50+ year lows so in this environment there is no reason for the Fed to deviate from its December assessment that “the current stance… is appropriate”. The target range for Fed funds will, therefore, remain 1.5-1.75% after Wednesday’s announcement.

With no new forecasts being released at this meeting it will be the tone of Jerome Powell’s press conference and the actual vote that is likely to be of most interest for markets. The annual rotation of voting members means that James Bullard (the dovish St Louis Fed President), Eric Rosengren (hawkish Boston Fed President) and Esther George (hawkish Kansas City Fed President) have been replaced by Richmond Fed President Thomas Barkin, The Atlanta Fed’s Raphael Bostic, and Mary Daly, the San Francisco Fed President. On the face of it these new voters appear to be more centrist than the three they replace and are likely to contribute to unanimous decision for no policy change.

We would also expect to hear Jerome Powell retaining his cautiously upbeat language, particularly given the positive conclusion to US-China trade talks. He is likely to reiterate that we will need to see a “material change” for the Fed to consider a policy shift. With the recent data flow suggesting the US is growing respectably, if unspectacularly, and with 4Q GDP set to have expanded by around 2% there is little sign of "material change" happening. As such this briefing is unlikely to be a catalyst for major market swings and that is the way the Fed would likely want it.

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