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Fed Won't Touch Rates Until at Least Next Year Amid Low Inflation

Fed Won't Touch Rates Until at Least Next Year Amid Low Inflation
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Monday, 17 June 2019 12:56 PM Current | Bio | Archive

At the start of the year, on January 30, the Federal Reserve wrote in its FOMC statement: “The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

At that time, it became clear to the financial markets that the Fed had the intention to stay on hold for an extended period of time.

Today, things have changed quite a bit and markets are pricing in “today” a few rate cuts that are spread over this year and into 2020, notwithstanding that the U.S. economy is “still in a good place”, but among other things, trade tensions with China don’t show signs of going away, on the contrary, which is of course a significant risk that the U.S. economy has to face.

So, what could come out from the Fed’s Federal Open Market Committee (FOMC) decision on Wednesday and what could Fed Chair Jerome Powell tell us during his press conference?

Investors could do well taking into account that this week’s FOMC meeting could, which doesn’t mean “will”, very well signal an “inflection” point for the Fed’s monetary policy path from hereon.

As an investor one could look at three important points:

  • First, if, and that’s a big if, the FOMC leaves the word “patient” in its statement, this would be a clear signal that the Federal Reserve is not convinced to start cutting rates, which probably wouldn’t be welcomed by the markets when we take into count that today, financial markets are already pricing in various rate cuts. That said, I’d like to add that in case the FOMC should remove the word “Patient” that in itself wouldn’t mean that the Fed would cut rates in July.
  • Second, when the so-called “dot-plots” that are part of the FOMC’s “Summary of Economic Projections” indicate “changes” in the rate expectations of the members of the FOMC at the end of this year, 2020, and 2021, this should give us a somewhat better idea about the probability of a rate cut or rate cuts. Here, investors should take care that if only one or two dot plots project a rate cut this year that would suggest that the Fed would remain on hold for this year. Besides that, if the FOMC’s cuts its projections for core personal consumption expenditures (PCE) inflation throughout the forecast period till 2021, and that currently stands at the Fed's 2 percent target, this could indicate that the Fed is close to start to lower rates in the hope it can boost inflation.
  • Third, the Fed Chair Jerome Powell’s press conference where he has the possibility to explain in clear terms questions about the FOMC’s statement and the summary of economic projections and in case if needed, “what” the Fed would really need that would allow it to cut rates.

I’m afraid that’s a simple question that doesn’t have a simple answer.

My personal opinion is that, with what we know today, the Fed will stay on hold this year and even into 2020, even with inflation running below its target of 2 percent because, for now at least, the U.S. economic and financial conditions are too strong.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
My personal opinion is that, with what we know today, the Fed will stay on hold this year and even into 2020, even with inflation running below its target of 2 percent because, for now at least, the U.S. economic and financial conditions are too strong.
fed, rates, inflation, year
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2019-56-17
Monday, 17 June 2019 12:56 PM
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