The Daily Update - The Fed

The next Fed meeting is scheduled for the 31st January but before that, tomorrow we have the minutes from their last get together in December. Market focus will be on the likelihood of the Fed taking a pause to reassess now they have rates at levels that could represent a neutral level.

Last Friday Fed Chair Powell was speaking in Atlanta just after the higher than expected Non-Farm Payrolls report. He said that there was no pre-set path for monetary policy and the Fed will be ‘patient’. On the NFP report, he welcomed the wage inflation number but added that it did not raise concerns for inflation.

The interest rate futures market has moved from looking for 2-3 rate hikes during 2019 a little over two months ago to now expecting no hikes this year and even the possibility of a rate cut. There is also speculation of a change to the Fed’s balance sheet unwinding process, which indicates how far market sentiment has moved.

Powell’s recent comments may give a clue as to the market's perception of Fed policy moving forward. Reassurance that he’s ‘listening sensitively to the message that markets are sending’ and ‘with the muted inflation readings that we’ve seen, we will be patient as we watch to see how the economy evolves’, as well as the promise to ‘we will be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy should that be appropriate to keep the expansion on track’.

These comments suggest to us the Fed chair has now become almost totally data dependent and so a pause in rate hikes is an odds on bet. Powell speaks again later this week and observers will be looking for further clues as to the committee’s thinking.  However, other influences need to be considered as non-voter Atlanta Fed’s president Bostic pointed out yesterday the government shutdown may hinder the Fed due to economic data not being released and of course we have the continued President Trump interference/influence.

On Friday Powell said he would not resign if asked to by the President. Lucky he is not a premiership football manager, that comment would be the kiss of death.

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