December FOMC Outlook : On Hold

The upcoming FOMC meeting is unlikely to be a game-changer. Chairman Powell has been very consistent over the past months regarding the short-term evolution of monetary policy. We expect rates to stay on hold, like everyone else in the market.

The recent macroeconomic data reinforces our view that the Fed will hold. November payrolls came out strong at 266,000 (10-month high) and the 3-month moving average payrolls was at 205,000. Though some of the increase was due to auto workers returning from a strike at General Motors, the labor market data confirms the US economy is still in very good shape. The only recent weak spots in terms of job creations – thought not worrying - are in retail trade and leisure & hospitality. Overall, we think US growth will move towards 1.6% next year, that inflation will be contained and the unemployment will stay below 4%. Not bad considering the economy is at the end of the cycle.

The only interest of the FOMC meeting will be the release of the latest Summary of Economic Projections, including the evolution of dot plot. We forecast that the median dot plot will move slightly lower in order to validate the monetary policy pause.

The likelihood of a rate cut during H1 2020 remains high considering risks related to the trade war, persistent China’s slowdown and concerns over financial risks such as CLO.

2019 Quantitative Tightening has been erased in less than three months. We are still puzzled about what is really happening in the US repo market. As pointed out by the BIS, hedge funds have certainly exacerbated the current turmoil, but the key problem is related to lack of trust between banks to lend cash. We will probably know more about funding issues on Thursday, as the Fed is expected to announce its 2020 calendar offerings. In our view, “Not QE” is likely to last longer than most expect.