For many investors, the trajectory of Federal Reserve (the Fed) policy remains puzzling. Unfortunately, the so-called “dot plot,” showing the preferred year-end target interest rate for each of the 17 members of the Federal Open Market Committee (FOMC), does little to help: the median vote suggests no additional change in 2019, but underneath the surface the story gets murkier. The FOMC seems quite divided: five members want a hike, five no change and seven an additional cut. The 2020 outlook is even murkier, with a wider dispersion of views.
But looking at past actions and statements of the 10 voting FOMC members, it is possible to tease out what monetary policy might actually look like by the end of this year. Three – Quarles, George and Rosengren – likely think interest rates should be higher; the latter two dissented against the September cut. Another four – Evans, Brainard, Williams and Clarida – have expressed that interest rates are presently well positioned. And three – Powell, Bowman and Bullard – could want rates to go even lower; indeed, Bullard dissented in September, arguing for a 50 basis point cut.
The largest camp, therefore, is the one that advocates for patience in setting monetary policy. But if Chair Powell does indeed want another cut – and he notably refrained from calling for patience – he may drag some centrists to his side of the aisle. The likelihood of an additional cut in 2019 is, as a result, higher than the dot plot may suggest.
Looking to 2020, the voting composition of the FOMC will change: presidents from Chicago, St. Louis, Kansas City and Boston will rotate out for presidents from Cleveland, Philadelphia, Dallas and Minneapolis, and things will become slightly more hawkish. The dot plot suggests no change in interest rates next year; but the voting composition suggests that rates may move slightly higher.
But of course, there is more to the trajectory of monetary policy than the dot plot. For one, investors should consider the political climate in 2020, when an already-politicized Federal Reserve may wish to leave rates unchanged in an election year. Moreover, should the macro environment change meaningfully over the course of the year, interest rate policy will certainly change alongside it.
As a result, investors have the unenviable task of juggling a number of competing factors when betting on the future of interest rates. But what does seem certain is that if interest rates move, they likely won’t move radically. For a market that is anticipating two more cuts through the end of next year, expectations may need to be tempered.
The market and the Fed disagree on where rates are going
FOMC and market expectations for the federal funds rate
Source: Bloomberg, FactSet, Federal Reserve, J.P. Morgan Asset Management.
Market expectations are the federal funds rates priced into the fed futures market as of the following date of the September 2019 FOMC meeting and are through August 2022. *Long-run projections are the rates of growth, unemployment and inflation to which a policymaker expects the economy to converge over the next five to six years in absence of further shocks and under appropriate monetary policy. Data are as of October 3, 2019.