Fed Stands Pat In First Unanimous Decision Since May; Dots Show Policy On Hold Through 2020

The Fed kept rates on hold at their final meeting of the year, as expected. There were no dissents. It was the first unanimous decision since May.

The dot plot shows no hikes in 2020, consistent with the “good place” characterization of policy (more on that below). Policy is “appropriate to support sustained expansion of economic activity”, the Fed says.

In the statement, the labor market is described as “remaining strong” and economic activity as expanding at a “moderate rate”. Household spending is “strong” but business fixed investment and exports “remain weak”. Market-based measures of inflation “remain low”.

The new projections show a lower unemployment rate and unchanged median GDP forecasts. The 2019 median core PCE inflation outlook was revised lower to reflect… well, to reflect reality.

The dots do show a hike in 2021, but reading too much into that is pointless. Nobody knows what the macro backdrop is going to look like next week, let alone next year.

(BBG)

Since the October meeting, officials have been keen to reinforce the “mid-cycle adjustment” characterization of the three rate cuts delivered since July. In essence, the hope is that the measures adopted so far will be enough to prolong the cycle. Anything beyond three cuts would be virtually impossible to spin as “insurance”.

Officials have also parroted the “in a good place” description of policy on too many occasions to count. That was introduced in October and it’s been the go-to line since. The “policy is likely to remain appropriate” refrain is an extension of the “good place” story.

“The Fed’s communication since the October meeting has been crystal clear: policy is appropriate and there would need to be a ‘material reassessment’ of the outlook to adjust rates”, BofA said, in their preview. There’s been no shortage of speculation around what would constitute cause for a “material reassessment”, and Powell will doubtlessly be quizzed on that in the press conference, as he was in October.

The data has generally cooperated of late. Third quarter GDP came in ahead of estimates on the initial read and was subsequently revised higher, even as business spending remains subdued. The labor market is clearly doing well, and consumer sentiment has rebounded. The manufacturing sector remains in a slump according to ISM, but the Markit gauge paints a prettier picture.

Meanwhile, inflation remains subdued, providing the committee with plenty in the way of plausible deniability when it comes to persisting in a reasonably accommodative lean, no matter how strong the labor market.

“Economic and financial conditions have changed only modestly on net since the FOMC met in September, with roughly stable growth, a firmer labor market, and somewhat easier financial conditions, but slightly softer price measures”, Goldman wrote, headed into Wednesday. The bank expected “only a minor change to the statement’s characterization of the economy”.

Meanwhile, external risks have ostensibly dissipated. Tensions between Washington and Beijing are set to ease, hopefully as soon as tomorrow, although the interplay between Fed policy and trade escalations is a persistent source of consternation for Powell. Donald Trump has a pernicious habit of escalating the trade war in order to force markets to price in rate cuts. Market pricing then corners the Fed, forcing policymakers to choose between wrong-footing the bond market at the risk of catalyzing a tightening in financial conditions, or becoming a slave to that same market in true “tail-wagging-the-dog” fashion.

We won’t know whether that dynamic is set to return until Trump delivers his now customary review of the Fed meeting on Twitter.

Obviously, the market is concerned about the year-end turn in short-term funding markets. The Fed has been conducting overnight and term repos since the September tumult in an effort to smooth things out and keep control of the policy rate, but jitters persist. Despite billions in bill purchases (i.e., the resumption of balance sheet expansion), demand for liquidity over year-end (i.e., the two 42-day repos and this week’s 28-day operation) remains voracious. The Fed on Wednesday reiterated plans to purchase bills at least through Q2 of next year, and said the plan is still to conduct term and O/N repos at least through January.

The incomparable Zoltan Pozsar this week warned that the Fed (and the market) is underestimating the potential for a year-end squeeze. Powell will doubtlessly be compelled to weigh in on that during the press conference as well.

Bullets

• Longer-run median unemployment rate 4.1% compares to previous forecast of 4.2% at Sept. 18, 2019 meeting
  • 2019 median jobless rate at 3.6% vs 3.7%
  • 2020 median jobless rate at 3.5% vs 3.7%
  • 2021 median jobless rate at 3.6% vs 3.8%
  • 2022 median jobless rate at 3.7% vs 3.9%
• Longer-run real GDP median projection of 1.9% compares to previous forecast of 1.9%
  • 2019 median GDP growth 2.2% vs 2.2%
  • 2020 median GDP growth 2.0% vs 2.0%
  • 2021 median GDP growth 1.9% vs 1.9%
  • 2022 median GDP growth 1.8% vs 1.8%
• Longer run PCE inflation median at 2.0% compares to previous forecast of 2.0%
  • 2019 median PCE inflation 1.5% vs 1.5%
  • 2020 median PCE inflation 1.9% vs 1.9%
  • 2021 median PCE inflation 2.0% vs 2.0%
  • 2022 median PCE inflation 2.0% vs 2.0%
• 2019 median core PCE inflation 1.6% vs 1.8%
• 2020 median core PCE inflation 1.9% vs 1.9%
• 2021 median core PCE inflation 2.0% vs 2.0%
• 2022 median core PCE inflation 2.0% vs 2.0%
• Longer run Fed funds median at 2.5% compares to previous forecast of 2.5%
  • 2019 median Fed funds 1.6% vs 1.9%
  • 2020 median Fed funds 1.6% vs 1.9%
  • 2021 median Fed funds 1.9% vs 2.1%
  • 2022 median Fed funds 2.1% vs 2.4%

 Median assessment of appropriate pace of policy

• 2019 1.625% (range 1.625% to 1.625%); prior 1.875%
• 2020 1.625% (range 1.625% to 1.875%); prior 1.875%
• 2021 1.875% (range 1.625% to 2.375%); prior 2.125%
• 2022 2.125% (range 1.625% to 2.875%)%); prior 2.375%
• Longer Run 2.5% (range 2.000% to 3.250%); prior 2.5%

Full statement

Information received since the Federal Open Market Committee met in October indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1‑1/2 to 1-3/4 percent. 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 Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.

 

Dots

December

September

Projections

December

September