The November FOMC Minutes emphasised that ‘monetary policy was not on a preset course’, it should be ‘guided by incoming data’ and that ‘a gradual approach’ remained appropriate. Another 25 basis point hike in the Fed Funds target range in December still looks extremely likely as ‘almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon’ assuming no drastic change in the job and inflation data.
A ’flexible approach’ seems to be the order of the day with many participants noting that the statement language may need to be amended to emphasise this and the ‘evaluation of incoming data’. Importantly, ‘a few participants, while viewing further gradual increases in the target range of the federal funds rate as likely to be appropriate, expressed uncertainty about the timing of such increases. A couple of participants noted that the federal funds rate might currently be near its neutral level’. Indeed, Jerome Powell’s speech at the Economic Club of New York earlier this week gave a sense of a more cautious approach to rate rises than his October comments noting this time interest rates ‘remain just below the broad range of estimates of the level that would be neutral for the economy’ and he acknowledged that the economy is still to feel the full effects of the previous tightening hence they ‘will be paying very close attention to what incoming economic and financial data are telling us.’
If the Fed raises rates by 25 basis points in December it would bring the Fed Funds target range to 2.25-2.5% which would be in touch with the bottom of the September forecast range of neutral estimates (2.5-3.5%). Added to which the Fed is continuing its balance sheet contraction and growth momentum is weakening (most evident in the housing and auto sectors): the minutes flagged ‘some signs of slowing in the interest-sensitive sectors of the economy’ and increased uncertainty due to fiscal and trade policy. Thus, we would expect a continued debate about whether it may soon be appropriate for a pause in tightening and the FOMC’s December forecasts will be scrutinised for any revisions.
The US Treasury yield curve has flattened over the month with the yield on the 10 year UST at 3.02% at the time of writing. Global growth momentum continues to weaken and trade tensions remain an ongoing added risk so investors will be waiting to see if the talks between Presidents Trump and Xi take a constructive line at the G20 gathering this weekend.