Fed Holds Steady on Rates for Now
It appears to us that we are now in a holding pattern for rates.
At the conclusion of its December meeting, the Federal Open Market Committee voted to maintain its target rate range at 1.5%-1.75%. For the first time in five meetings, the vote was unanimous. This was arguably a non-controversial meeting, with the Fed having telegraphed that it would require some significant deterioration in the economy or exogenous risk (such as trade wars) to warrant further cuts. It appears to us that we are now in a holding pattern for rates. To this end, the Fed changed its language slightly, stating that, “The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective.” The release maintained the “continue to monitor” language from its last release, indicating a leaning toward stability, while also adding in language around specifically monitoring “global developments and muted inflation pressures.” To us, this opens the door a bit more for the Fed to cut rates in the future if inflation begins to drop precipitously, but for now, we think a hold on rate movements is the base case for 2020. Chairman Jerome Powell was also questioned on the Fed's ability to raise inflation in the press conference, admitting that it has been a challenge and that the relationship between items like inflation and unemployment has weakened. The latest unadjusted CPI inflation measure came out today, with total CPI inflation coming in at 2.1% for the 12 months ended November 2019 and core CPI coming in at 2.3%. While this isn’t the Fed’s preferred inflation measure, we think it still helps that it’s not that low, supporting a “no more rate moves for now” base case in 2020.
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