Yesterday in the minutes released from the FOMC for the December meeting, when the Fed hiked its benchmark by 25 basis points, the Federal Reserve formally acknowledged that the policy path for rates was ‘less clear’. The minutes also note that in the current low-inflationary environment, the Fed can ‘afford to be patient about further policy firming’ adding that ‘If incoming information prompted meaningful reassessments of the economic outlook and attendant risks, either to the upside or the downside, their policy outlook would change’.
The minutes echo Fed Chairman Jerome Powell’s remarks on Friday, whilst seating with two former Fed chairs, that policymakers will be ‘patient’ going forward. It was also noted that a number of Fed members believe that the risks on the horizon ‘that had become more pronounced in recent months might unfold’ and that recent Fed moves were ‘still working their way through the economy’.
In its summary, the minutes stated ‘With an increase in the target range at this meeting, the federal funds rate would be at or close to the lower end of the range of estimates of the longer-run neutral interest rate, and participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier’ adding that ‘Concerns over escalating trade tensions, global growth prospects, and the sustainability of corporate earnings growth were among the factors that appeared to contribute to a significant drop in U.S. equity prices’.
Later today we have various Fed members speaking, however, a couple of voting members have already spoken. Rosengren believes that monetary policy is currently balancing risks and that he thinks the Fed can ‘wait for greater clarity before adjusting policy’ adding that he won’t rule out a change to balance sheet policy in the event of a slowdown. Evans talks along the same lines, believing that ‘recent financial market developments and uncertainties regarding growth abroad, trade policy, and possible fiscal headwinds have cumulated to increase the downside risks’.
At time of writing the implied probability of a rate hike in January is 0.5% and just 1.5% in March, however, the chances of a rate cut this year are now at over 20%.