FOMC Meeting Next Week. No Iceberg In Sight; All Ahead Full
FOMC Meeting Next Week. No Iceberg In Sight; All Ahead Full
The Federal Open Market Committee meets this coming Wednesday, Dec. 10-11. It’s the last meeting of 2019 and investors can be fairly certain there will be no fireworks this time. None. This marks an important change from the way things were 12 months ago.
That’s all to the good given what happened at that last FOMC meeting in 2018 on Dec. 20. Think back now to that conclave, even though you probably don’t want to. That was when the FOMC hiked the Fed funds rate for the third time in the year, and after six hikes in the previous 24 months.
The global stock market was falling apart, with investors worried about trade and a then evident global growth slowdown (not the case now as you can see on page 3.) A kind of mini-panic ensued and American stocks entered a bear market, if briefly, by Christmas Eve, down 20% on an intraday basis from September’s high. This should be laid squarely at the Fed’s door, which we’ve said a few times.
Of course, since then the Fed has reversed course, something both investors and President Donald Trump have found pleasing. And the market is up about 25%.
So what about this upcoming meeting. My guess is the Dec. 11 press conference afterwards with Chairman Jerome Powell might be of minor interest, but I’m guessing he’s not going to go off script in any way. There will be a lot of Happy Holiday’s kind of stuff. His playbook says the Fed has done enough cutting, that it is data-dependent, and, oh by the way, a new round of hikes is too far off to contemplate. And see you next year. All in all, good news for U.S. equity investors.
The CME Fed futures market, which has a good predictive track record about rates, shows investors expect the Fed funds rate to be untouched at yearend and that the probabilities of a new Fed hike don’t rise until late in 2020.
Separately, an interesting recent WSJ article argues that the Fed has now set a high bar for raising rates and “one that looks unlikely to be met for a long while.” The paper quotes Powell from October’s FOMC press conference as saying, “We would need to see a really significant move-up in inflation that’s persistent before we would consider raising rates.”
It’s going to take some doing to get to 2% inflation, given the price data we’ve been seeing lately. The personal consumption expenditures index, which the Fed follows, was up 1.3% in October. Fed officials have made noises that suggest they would be comfortable with higher than 2% inflation for a short while.
Separately, the New York Fed continues to add temporary liquidity to the money markets, with tens of billions going into to the financial system through the use of repos and short-term loans.
Bottom Line: The Fed’s on hold until further notice.
The U.S. Treasury 10-yr note yield was around 1.84% up from 1.77% last week and below 1.5% in September.
Upcoming: 1/28-29 - FOMC meeting. No action expected.
