Following the Fed’s announcement, please see below for market views from the Global Fixed Income, Currency & Commodities Team (GFICC):

The Federal Open Market Committee (FOMC) maintained the target range of 1.50% ‐ 1.75% for the Federal Funds rate.  At the press conference, Chair Powell communicated a desire to see the expansion sustained but continued to communicate for a second meeting in a row that monetary policy was in a good place.  The Chair appeared confident that the 75 bps of cuts to date in 2019 were sufficient to offset the downside risks and allow the Fed to be data dependent going forward.

The December FOMC statement maintained most of the language used in October. There were no changes to the economic assessment. While the Committee still expects a strong labor market and 2% inflation as the most likely outcomes and removed the comment that uncertainties around the outlook still remain. The statement maintained that they will continue to closely monitor the data, including global developments and muted inflation pressures.

There were no dissenters at the meeting.

Committee Statement

We can break the statement into two parts:

• Economic Assessment – No changes
• Outlook – The Committee continues to communicate data dependence by maintaining within the statement that they will “continue to monitor” incoming information on the economic outlook including inflation data and global developments.   

Summary of Economic Projections

• Within the projections, growth and inflation forecasts were little changed. Core PCE inflation is not projected to rise to the 2% target till 2021.
• The median dot for 2020 shows the Fed Funds rate at 1.625% which matches the current rate. The consensus around no rate hikes was strong with 13 out of the 17 submissions showing no change and the other 4 showing 1 rate hike. 

Beyond 2020, the 2021 median dot moved 25 bps lower to 1.875% indicating one hike in 2021. The 2022 dot was also lowered by 25bps to 2.125% indicating an additional rate hike in the out years. The long run median dot which was unchanged at 2.5%.

Chair’s Press Conference

Chair Powell explained the Committee’s reaction going forward now that a number of insurance cuts have been executed and the Fed has now paused. 

The Chair re-iterated his message from October stating that the incoming data would need to result in a “material reassessment” in the outlook in order to serve as a sufficient catalyst for the next move in the policy rate.  The Chair indicated “significant and persistent inflation” as his criteria before returning to a tightening bias. This comment reinforced the belief that the hurdle rate to hike was significantly higher than to cut rates.  The Chair also pushed back on drawing explicit comparisons to the Fed’s actions in the 1995 & 1998 experiences given the differences, specifically in the inflation backdrop between the 1990s and today. Muted inflation is putting less pressure on the Fed to consider tightening policy and more opportunity to operate in an economy with a low unemployment rate for longer.

Several questions centered on year-end repo and funding risks, as well as the Feds actions to address these concerns.  The Chair discussed the existing temporary repo facilities, the Bill purchases and scope for tailoring regulations or adding a standing repo facility to address these persistent issues.                

Our View

• We expect the Fed to resume easing policy rates in 2020 after taking a pause to assess the landscape. Additional policy easing will become appropriate as US economic data continues to reflect moderating momentum on the back of continued trade and election uncertainty as well as few upside catalysts.   
• In today’s meeting, the Committee signaled they were still happy with where rates were and had no intention of adjusting them in the near term. Over the medium term, they appear to be uncomfortable committing to a more aggressive easing of policy until there are clearer signs of weakening in the service sector and labor markets.  However, the case for the Fed to continue to ease policy in 2020 should be bolstered by low inflation and inflation expectations which remains below the Fed’s 2% target.
• The Fed is continuing to conduct a monetary policy review in which they appear to be considering a modification to their inflation strategy in order to better achieve their inflation objective and avoid an unwanted downward drift in inflation expectations. Although a formal change is not imminent in the next few months, the trend of Fed speakers indicates the Committee is leaning towards some type of change that would encourage more inflation and could result in an average inflation target - which would incorporate past misses in inflation more explicitly. The result would mean easier policy for longer.