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In 2019 the Fed Got it Right; In 2020 No Fed Rate Moves Seen

Vito J. Racanelli

With 2019 soon to be in the books and the last Federal Open Market Committee meeting behind us, it’s a good idea (and not too presumptuous) to give the Federal Reserve a report card.

Clearly, this year the Fed got it right. The policymakers working inside the Marriner S. Eccles Federal Reserve Board Building in Washington, D.C., realized that they had hiked rates in error in 2018 because the world’s economic expansion was indeed slowing appreciably. It was the exactly wrong thing to do, and even doing nothing would have been better. Don’t expect a forthright admission of this from the Fed, which prefers to crow how it got things right this year. So this year the Fed gets an A, but last year was an F grade.

I don’t know the minds of the policymakers inside the Fed, but they surely didn’t want to be seen caving into the Donald, who was railing for lower rates. Right he was, but the president, by making it so public, put the central bank in a bad spot. No one wants to lose face.

The bank dragged its feet in cutting rates, and in doing so, according to the Wall Street Journal, is receiving some criticisms from a number of quarters that echo Trump’s harangues. “…Critics in Congress, Wall Street and within its own ranks accused it of courting inflation, debasing the dollar, enabling fiscal profligacy and distorting markets,” the WSJ article wrote.

We’ll see where this goes. Perhaps the Fed will go the other way now and be gun shy when to comes to raising rates—if and when needed. That could be a future problem and one that the Fed has encountered before: waiting too long to hike. Fed defenders like to say that the Fed is human and doesn’t have access to perfect information. That’s true of course, and my conclusion is that perhaps they are trying to do something that can’t be done properly: that is, “managing” a $21 trillion dollar economy.

The last FOMC meeting was anti-climactic, as I suggested it would be in these pages last week. At the press conference afterwards, Powell indicated the central bank isn’t likely to change interest rates for the foreseeable future. He suggested there is a lower threshold to reduce rates rather than to raise them.

The famous Fed dot plot of where FOMC members see future rate trends shows no projected rate cuts from any of the officials. None see a rate hike until 2021. As this column has noted repeatedly, if you want to know where rates are going don’t bother with the dot plot. Just watch the CME fed futures market.

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 14-day short-term loans.

Bottom Line: The Fed will drift into the background for a while.
The U.S. Treasury 10-yr note yield was around 1.82% down from 1.84% last week and below 1.5% in September.

Upcoming: 1/28-29 - FOMC meeting. No action expected.

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Vito J. Racanelli
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