Fed continues its pause; Too soon to react to coronavirus

Last week’s Federal Open Market Committee meeting was pretty much a yawn fest and the press conference held by Fed chairman Jerome Powell wasn’t much better. No fireworks. Just as expected, all ten members of the central bank’s rate-setting committee voted to hold the Fed’s benchmark federal-funds rate in a range of 1.5% to 1.75%. The Fed is comfortable.

I’m not sure this is comforting or complacency. Worth watching.

Just as importantly, the FOMC reiterated its intentions of doing nothing for the foreseeable future, as it watches what impact last year’s rate reductions have on U.S. economic growth.

“We’re comfortable with our current policy stance and we think it’s appropriate,” Fed Chairman Jerome Powell said at a news conference after the decision. Nevertheless, there was some suggestion that if the Fed were to change rates, the bias, if you can call it that, would be to the downside. In its statement, the Fed characterized consumer spending growth as moderate, a downgrade from “strong” in December, and said business investment had remained weak.

The one small wrinkle could be the coronavirus outbreak. The Fed chairman said it was too soon to say how the virus would affect Chinese, global and U.S. growth. “When China’s economy slows down, we do feel that,” he said.

Separately, the Commerce Dept said Thursday that the American economy expanded 2.3% last year, after rising at a seasonally and inflation-adjusted annual rate of 2.1% in the fourth quarter. That’s the lowest since 2016 but in line with expectations and with history since 2009. Undoubtedly, the U.S. China trade spat had a hand in lowering the numbers. Many economists expect the U.S. economy to grow at about the same pace in 2020.

The economy’s expansion last quarter reflected a boost from trade as exports increased and imports dropped sharply, amid slower U.S. household spending and higher tariffs on imports from China. Consumer spending rose at a 1.8% annual rate in the fourth quarter of 2019, down from a 3.2% pace the prior quarter, and business investment dropped for the third quarter in a row, while residential investment rose.

Regardless of what the Fed says about rate changes, investors should keep an eye on the CME Fed futures market, historically a good indicator. Fed futures now put a 50% or better rate change probability (reduction) in July, a change from previous timing of September. The U.S. Treasury 10-yr note yield was around 1.51%, down from 1.69% last week.

Upcoming: 3/17-18 - FOMC meeting. No action expected.

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