North America January 25, 2019 / 08:05 pm UTC

FOMC Preview: Doves Come Home to Roost

By Devon DeYoung, Kevin Harris

Bottom line: We and markets expect the FOMC to keep rates unchanged at 2.25-2.50% when the newly-dovish FOMC meets next Wednesday. Nearly all of the voting members that we have heard from in the inter-meeting period have indicated a willingness for the Fed to be “patient”, “pause” and “wait” (Figure 1). The key issue is Chairman Jerome Powell’s description of risks to the U.S. economy from overseas and from volatile financial conditions. Powell’s comments should help reveal the current center of Fed thinking after a recent dovish shift.

Figure 1: Most Recent Comments by Voting Members in the Inter-meeting Period

WilliamsJan-18Approach needed is prudence, patience and good judgment.
BrainardJan-18Generally speaking, labor market is extremely healthy, but there are some risks out there. Uncertainty over shutdown, China and Brexit.
QuarlesJan-17Real economy data very strong. Inflation well contained. Core base case remains very strong. Some global weakness may be transitory.
EvansJan-17Two hikes or fewer plausible in 2019.[1]
GeorgeJan-15Might be a good time to pause on rates.[2] Would give time to assess impact of hikes so far. More hikes might be needed if inflation pressures emerge. 
ClaridaJan-11Fed can afford to be patient, see how 2019 data evolves.
PowellJan-10No particular plan to raise rates a specific number of times. Fed has ability to be patient.
BullardJan-10December rate increase was a bit of an overreach, concerned on precipice of a policy mistake.
RosengrenJan-09Can wait for greater clarity.

Source: Reuters, Bloomberg, Continuum Economics

[1] As recently as January 9, Chicago Fed President Charles Evans backed three hikes this year.

[2] This is especially significant from Kansas City Fed President Esther George, a noted hawk.

But… What Data?

Despite policy makers’ rhetorical shift toward data dependence, there is precious little data for them to judge. Before U.S. President Trump announced a three-week continuing resolution today, the U.S. government had been shut down for 35 days—the longest shutdown in U.S. history. That means 35 days without many of the data releases the Fed relies on to gauge the health of the economy, such as housing starts and retail sales. 

Talking Feds

All FOMC meetings this year will be followed by a press conference, not just those where a new Summary of Economic Projections (SEP) is released, as was previously the case. At this month’s press conference, we expect Powell to echo his most recent comments, emphasizing that rates are not on a preset course and the FOMC can wait to see how the data develop. How he manages this, however, is critical to the market response. Powell’s job, at a time when markets are extremely sensitive to Fed guidance, is to keep the notion of future rate hikes alive while also offering assurance that the Fed will not put the expansion in jeopardy by ignoring risks to growth. This is no easy task, and the risk of a volatile response in asset markets is high. 

There will be discussion of the FOMC’s policy-making framework, a discussion which will continue throughout the year. There may also be a discussion of the final level of the balance sheet after quantitative tightening, which the Fed has previously said will be higher than before the crisis.

In as much as the Fed will comment on political matters, the statement may acknowledge the difficulties associated with the lack of data from the shutdown or discuss it as a downside risk to Q1 GDP growth

Market Implications—Powell as Volatility Trigger

The market has currently priced in no change in rates at the meeting, so markets are unlikely to move much on the rate decision. However, Powell’s comments have great potential for moving markets—stocks have been very sensitive to swings in the outlook for Fed policy in recent months. 

Markets are still pricing very low odds of a hike this year. This is unlikely to be disturbed by a meeting without an SEP reinforcing the Fed’s rate hike forecasts. Nonetheless, we maintain our call for one 25-bp hike each in Q3 and Q4

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