The Fed Continues to Hold Steady on Rates
We think a hold on rate movements is the base case for 2020.
At the conclusion of its January meeting, the Federal Open Market Committee voted to maintain its target rate range at 1.5%-1.75%. For the second meeting in a row, the vote was unanimous. This was yet again a non-controversial meeting, with market participants overwhelmingly expecting no change to rates just yet. The Fed has made clear that it would require some significant deterioration in the economy or exogenous risk (such as trade wars) to warrant further cuts. For now, we remain in a holding pattern. The language in the Fed’s press release was essentially unchanged. In describing consumer spending, the wording changed from “household spending has been rising at a strong pace” to “a moderate pace.” The release also stated that “monetary policy is appropriate to support...inflation returning to the Committee’s symmetric 2 percent objective,” whereas in the past release, the wording used was “inflation near the Committee’s symmetric 2 percent objective.”
These are very minor changes, and we wouldn’t read into them too much.The first is simply a nod to more current consumer spending trends, and the second was commented on in the press conference. The second change was simply meant to remove any ambiguity around the Fed’s commitment to its 2% inflation target, with this slight word change indicating that the Fed remains committed to its 2% goal, and it doesn’t want inflation to persistently run below that, even if it is “near” 2%. As long as the Fed remains committed to its 2% target, it could open the door for rate cuts in the future if inflation just won’t go higher, even if the economy is OK.
For now, however, we think a hold on rate movements is the base case for 2020. As a reminder, the Fed is undergoing an in-depth policy review that should conclude sometime in the middle of 2020, and rethinking tools and targets are all part of that process. This could bring changes to the Fed’s framework, and therefore policy decisions, and will be important to watch.
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