Monetary policy at US Federal Reserve on hold

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  • The Federal Open Market Committee left its federal funds target rate unchanged at 1.50% to 1.75% at its December 10-11 meeting.
  • After three precautionary rate cuts in July/September/October the Fed has now signalled clearly that it does not expect to changes rates for some time.
  • The Summary of Economic Projections removed the previously expected rate hike in 2020. A strong majority (13 of 17 FOMC members) estimate that the federal funds rate should be unchanged at year-end 2020. The remaining four committee members project a rate hike in 2020.
  • Our fixed income team expects the FOMC to lower the federal funds target rate in 2020 to support the US economy.

At this time last year all but two of the FOMC members predicted that it would be appropriate to raise the federal funds target rate at least once in 2019, with six members expecting three rate increases.

In the event and despite no major deviations of economic growth or inflation from the Fed’s predicted paths, the FOMC cut rates three times on a precautionary basis to guard against downside economic risks.

As inflationary pressures remain subdued and well below the Federal Reserve’s target of 2% any removal of 2019’s ‘precautionary’ rate cuts does not appear to be on the FOMC’s agenda.

Rate hikes in 2020 will require a sustained and significant pick-up in inflation

Federal Reserve Chair Powell made it clear that it would now require a significant and sustained rise in inflation for the committee to raise policy rates. He emphasised the fact that the decorrelation between the rate of inflation and unemployment suggests structural changes have occured in the US economy. As a result any drawing of parallels with previous era events when the FOMC reversed ‘precautionary’ rate cuts would now be inappropriate.

We do not anticipate the sort of sustained surge in US GDP growth that could result in a significant rise in US inflation in 2020. On the contary our fixed income teams expect the US Federal Reserve to lower the federal funds target rate in 2020 to provide further support to the US economy.

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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

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