Following the Fed’s announcement, please see below for market views from the Global Fixed Income, Currency & Commodities Team (GFICC):
Consistent with our and the market’s expectations, the Federal Open Market Committee (FOMC) maintained the Fed Funds rate target range of 2.25% ‐ 2.50%.
The January FOMC statement was notably altered in order to reflect the Committee’s commitment toward data-dependence and bias towards patience in regards to additional rate hikes. Despite viewing a strong labor market and sustained economic expansion as the most likely outcome, the Committee removed the balance of risks to the outlook from the statement given the reduced visibility around the US and global economy due to “cross-current” described in detail below.
Although the official statement did not reference the balance sheet normalization process, the Committee released an additional document on balance sheet normalization which indicated the Committee’s desire to continue to use interest rate policy as their primary tool but with flexibility available to adjust balance sheet policy in the future within the context of maintaining the current floor system of ample reserves. For now, the decline in the Fed’s asset holdings will continue in the background at the max run-down rate (30bln Treasuries / 20bln MBS).
Overall, this was a decidedly more dovish statement than market participants had expected.
We can break the statement into two parts:
There were no dissenters.
Chair’s Press Conference
Chair Powell remained somewhat upbeat on the US economy, specifically the labor market, but recognized the continued “cross-currents” which included policy uncertainty (trade and Brexit), the weakening global growth backdrop and the impacts of the government shutdown. He recognized the contradiction between the still robust economic data in the US and the cross currents described below and stated the best way to manage risk in this situation was to be patient and take a “wait and see” approach. Chair Powell also described the case for raising rates to have diminished due to muted inflation risks.
On the balance sheet, Powell stated that the Fed is actively working towards a decision on when to conclude the balance sheet run-off given that the balance sheet will need to be larger than it was pre-crisis. In addition, he reiterated the details of a separate document released with the statement which emphasized that interest rate policy would remain a primary tool but balance sheet policy was not on a pre-set course and ultimately the run-down in the balance sheet will be within the context of an abundant reserve regime.
The chairman struggled to explain the rather abrupt shift in the tone of communication that appeared to move even further beyond the assurance he provided the market during his January 4th comments at the American Economic Association (AEA). Powell cited persistently tighter financial conditions and a continuing narrative around weaker global growth as reasons for the shift. However, it was challenging to view the cumulative changes in the communication post at the December FOMC meeting as being anything other than reactive to financial markets. It remains to be seen whether today’s press conference performance represents a material shift away from the current hiking cycle or indeed a true pause before the cycle continues.
All eight FOMC meetings will be followed by a Press Conference this year.