FOMC Preview: Fed on hold for at least a couple of meetings
|Fed outlook: 'current monetary policy stance is appropriate'
Following three cuts in a row, we expect the Fed to remain on hold (target range 1.50-1.75%) when it meets next week. FOMC members have made it clear that they think the 'current stance of monetary policy is appropriate' and that they now want to wait some time and see how things play out before acting again.. At the latest meeting in October, the Fed surp rised us by removing its easing bias and,as data hasnot really p ainted a different p icture,it is difficult to see why FOMC members should change their minds (if any thing the strong jobs rep orts in recent months should calm fears within the board desp ite some subdued ISM /PM I indices). Hence, we do not expect major changestothe statement.
Focus islikely to be on the updated ‘dots'(i.e. policy rateprojection). The Fed cuttingonce more than the median projected at the last dot up date in September will automatically lower the ‘dots' this year. The big uncertaintyis what the Fed will signal for next year. We expect most members tosignal that they expect the Fed funds target rate toremain unchanged in 2020b ut we are looking to seewhether one to two FOMC members signal an easing bias (however, this is not our base case).
Our base case is that the Fed may deliver a fourth cut some time in the spring.However, this is not a high conviction call. This probably divergesfrom consensus among Fed watchersand aligns morewith market p ricing (a full cut is priced in next year). We do not believethe US is heading for a recession but we think the economy is a bit more fragile than the Fed does.While the US-China trade negotiations seem to be heading in the right direction, in our viewa phase 1 deal would not be enough to kick-startan investment boom. This is becausethe fundamental uncertainty in the shortrun remains high,with negotiations probably moving to phase 2 (the p ermanent p art) (see also the US section of The Big Picture –Rays of light for the world economy, 2 December. Many investment indicators are not looking too strong at this time.
If, against our exp ectation, the US and China do not reach an agreement on phase 1 and Donald Trump moves forward,imp lementing higher tariffs on consumer goods imp orted from China, it is a different situation, whenmarkets may start pricing in a higher p robability of a cut in the short runtoo.
In addition, we disagree with the Fed when it saysthat monetary policy is now accommodative. The Fed cuts have ledmonetary policy to be around neutral (from tight previously ) and,given inflation is runningp ersistently below 2%,we believeit would be a good idea to support the economy more.
Download The Full FOMC Preview
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.