FOMC review: On hold throughout 2020 – Danske Bank

Danske Bank analysts point out that as per expectations, the Fed did not change its Fed funds target rate (still 1.50-1.75%) after three cuts in a row.

Key Quotes

“The FOMC members thinking that the "current stance of monetary policy is appropriate" have now been included in the statement officially, which, however, still highlights the challenges with slower global growth, a trade war and muted inflation pressure.”

“Looking at the 'dots', 13 out of 17 FOMC members expect the target range to remain unchanged throughout 2020, while four expect one hike. It is striking that no one signals a cut, which is at odds with market pricing, as investors still price in a full cut next year.”

“In general, the 'dots' over the coming years have a hawkish bias, as it is general trending up, despite Fed chair Powell basically ruled out hiking rates as long as inflation remains below 2%.”

“Our base case remains that the Fed will deliver a fourth cut some time during the spring, which is, however, not a high conviction call. Here we probably diverge from consensus amongst Fed watchers and are more aligned with market pricing (a full cut is priced in next year).”

“We are not expecting the US to head 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, a phase 1 deal is in our view not enough to kick-start an investment boom, as the fundamental uncertainty in the short-run remains high, with negotiations probably moving to phase 2 (the permanent part). Many investment indicators are not looking too strong at the moment, in our opinion.”