FOMC meeting: From “Powell Pivot” to “Powell Pause”
Head of Macroeconomic Research
Summary: The December FOMC meeting was not a game-changer. Interest rates were left unchanged and the Fed reiterated its view that the economy is on track. Recent developments in the repo market were a big theme during the Q&A session.
As widely expected by market participants, the Fed voted unanimously to leave interest rates unchanged at the December FOMC meeting – the Fed funds rate stands in a range of 1.5-1.75% and the interest rate on excess reserves remains at 1.55%. The biggest change in the FOMC statement was the inclusion of the mention that “the current stance of monetary policy is appropriate” to sustain expansion of economic activity, strong labor market conditions, and inflation near 2%. The statement also removed reference to “uncertainties” regarding the outlook. During the press conference, Chairman Powell especially highlighted that some uncertainty around trade would be removed from USMCA (the agreement reached on Nafta trade deal replacement has been approved by Democrats in Congress).
In-line with the rate pause, the Dot-Plots are collapsing and signal no action in 2020. Like in the September projections, the Fed still sees one hike in 2021 and one hike in 2022 and reiterates its data-dependent approach adding that not a single factor influences monetary policy.
One of the most interesting aspects of the FOMC meeting was the release of the latest Summary of Economic Projections. GDP and inflation forecasts were unchanged and are aligned with the market narrative (inflation under 2% and lower growth), but unemployment rate for 2020 was cut to 3.5% - a level where we see slack in the labor market - versus a previous forecast at 3.7%.
To sum up, the FOMC considers the US economy is in a good place, and monetary policy is positioned well, unless something unexpected happens.
Discussion on the latest developments in the repo market
One of the biggest themes during the Q&A session was the recent developments in the repo market and the growth of the Fed's balance sheet. In less than three months, 2019 Quantitative Tightening has been completely erased due to the turmoil in the repo market.
Chairman Powell was consistent with his previous statements. He confirmed he is confident regarding the evolution of the repo market and mentioned the positive effect of the Fed intervention. However, he added that “standing repo facility is something that will take time to evaluate”.
He indicated that the market has been functioning well in the last couple months and that current pressures are manageable.
This view is not shared by all market participants that see rising costs, with repo rates now at almost 4%, as a warning signal indicating that the monetary transmission mechanism is broken.
Some market participants also expect that difficulties will increase in year-end, which is not “unusual” at this period of the year, as acknowledged by Powell. He clearly let the door open, at least in the short-term, to more purchase of securities if necessary.
Tonight’s meeting does not change our view on the Fed. We think that the Fed is still too optimistic about the outlook. We see that the likelihood of a rate cut during H1 2020 remains high as US growth momentum is weaker than a year ago and downside risks are still elevated (trade war, China’s slowdown, funding issues etc.). We expect that the US manufacturing sector will stay weak in coming months, which could force the Fed to reassess the balance of risks.
On the top of that, funding issues in the repo market are still cause for concern. The Fed has already injected $350bn, but total market support is likely to exceed $500bn in coming months. We are much more worried about what is happening and what it signals regarding monetary policy transmission than the Fed. We will know more about the extent of the problem tomorrow, as the Fed is expected to announce its 2020 calendar offerings. We have little doubt that “not QE” is likely to last longer than most FOMC members expect.
Quarterly Outlook Q1 2022
Quarterly Outlook Q1 2022: Fuelling the Energy Crisis
- The green transformation is fuelling the energy crisis. Is it time to base our energy future on reality not fantasy?
Energy crisis could turn energy stocks into secular winnerWith long-term expected returns for the global energy sector close to 10%, we look at 40 stocks that could be set to cash in.
Commodities supported by greenflation and tight supplyThe commodity sector recorded its best year since 2000 in 2021. Will the good times will keep rolling in 2022? Ole Hansen thinks so.
The bond bear market will not spare anyoneInvestors will need to prepare for the pain of a bond bear market in 2022. But are there opportunities out there, too?
Mean reversion for big 2021 moves and lots of volatilityDon't expect the Japanese yen or Chinese renminbi to stay at their overstretched valuations for long. Get the FX Outlook now.
The future in energy-intensive proof-of-work looks dimIn the midst of a global energy crisis, electricity-guzzling Bitcoin and Ethereum are set to feel the heat from politicians and investors.
Australian equities poised to benefit from the energy crisisThere may be an energy crisis, but that's fuelling a charge in the ASX. FInd out which stocks could be burning hot this quarter.
The EU’s unwise energy policyThe EU's energy crisis is one of the main drivers of inflation. Is there any relief around the corner, or is the situation critical?