As expected, the Fed left its Fed Funds target range unchanged at 1.5-1.75%. The decision was a unanimous one in contrast to recent decisions. The post meeting statement noted the Committee ‘judges that the current stance of monetary policy is appropriate’ and ‘will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures’. Importantly, the statement suggested increased comfort with the outlook as it removed the reference to ‘uncertainties’.
Jerome Powell’s comments on inflation also struck a dovish note stating that ‘inflation is barely moving’ and ‘In order to move rates up, I would want to see inflation that’s persistent and that’s significant’. These comments were consistent with the FOMC’s revised economic projections which show the median dot plot forecasting no change in the Fed Funds rate for 2020: 13 officials predicted no change and only 4 forecast a 25bps increase. Forecasts for growth and PCE inflation were unchanged from the September projections for the 2020-2022 period. However, we continue to expect that the Fed may need to cut rates again, most likely in March 2020, as growth is expected to remain anaemic due to weak investment and is relying on the consumer to support growth. Against this anaemic growth and benign inflation backdrop, we see scope for further flattening in the yield curve over the medium term.
Unsurprisingly, the press conference sought further comments from Jerome Powell on the repo market. He seemed comfortable with the Fed’s handling of the situation noting the Fed would continue to monitor the situation closely but they are not looking to completely eliminate repo volatility: ‘I think for the last couple of months, repo market operations have been functioning well, short term rates are stable. Markets are functioning’. He went on to note ‘there will come a time when it will be appropriate for overnight and term repo to gradually decline. We don't know, we can't know today what the timing of that will be.’ But the Fed remains flexible and is open to ‘purchase other short term coupons securities, we would be prepared to do that, if the need arises. But we are not in that place. It very much looks like the bills, bill purchases are going well just according to expectations.’
All in all, much of the commentary was as expected reflected in USTs and the S&P 500 trading marginally better on the day.