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    Instant Insights: mission accomplished?

    Instant Insights: mission accomplished?

    December 12, 2019 Global macro, Instant insights
    The final Federal Reserve (Fed) meeting of 2019 brought a run of three consecutive rate cuts to an end.

    The Fed's messaging even tilted slightly towards the optimistic side, removing any mention of "uncertainties" to the outlook, partly as the trade conflict with China appears closer to stabilizing.

    Mission accomplished?

    Today's takeaway for us is that the Fed believes that its recent activity has accomplished its mission of 'sustaining the expansion'.

    Perhaps symbolic of a 'thumbs up' from investors, the recent (and oft-feared) yield curve 'inversion' is no more, indicating that fears of a recession have been mitigated, at least for now.

    Figure 1: Have the last three cuts achieved the Fed's objective?

    Source: Bloomberg as of December 11, 2019.

    An acceleration in housing activity and improved confidence indicate more fundamentally that the Fed’s cuts have had a measurable stimulus effect.

    The FOMC thinks the next move is up – not down

    Looking at the committee’s refreshed ‘dot plot’, a large majority comprising 13 of its 17 members expect no change in rates by the end of 2020. That’s no great surprise, but more interesting is that absolutely no one predicted a cut (the other four expect one hike).

    Looking further, the median estimate is for rates to be 50bp higher than today’s mid-range at the end of 2022. Over the next three years, not a single FOMC member expects rates to be any lower than today.

    The longest cycle on record has further legs?

    The Fed now expects GDP at around 1.9% pa through to 2022 and for inflation to rise to its 2% target by 2021. This implies that – despite talk of letting inflation overshoot – the majority of the committee sees no need for this to be a consideration. The Fed likely feels that inflation will remain persistently low (as CPI has done for the entire cycle).

    Still, Chairman Powell did state that “several members” would welcome above-target inflation. For the next year at least, there appears to be some desire to avoid raising rates to allow the economy to run somewhat hotter next year, even if higher inflation were to be a result.

    What would it take for another move in policy rates?

    We believe that there is a high hurdle for the Fed to be spurred into action again. For the Fed to cut, it would likely take a material slowdown in growth, and not merely lackluster inflation. For a hike, it would take a material rise in inflation, beyond the Fed’s tolerance threshold.

    However, we expect GDP to remain in line with Fed’s expectation next year (at around 2%) and for inflation to remain modest. Therefore, we think we’re unlikely to see much urgency from the majority of the committee for any action.

    Ultimately – the Fed could stay put for a while yet.

     

     


    Please note: any forecasts or opinions expressed herein are Insight Investment's own as of the date of this communication and may change.

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