US economy

A ‘very, very’ patient Fed: What analysts are saying


The Federal Reserve on Wednesday further cut its outlook for interest rate rises this year and laid out plans to cease trimming its balance sheet, reinforcing the central bank’s dovish turn after boosting rates four times in 2018.

“The Fed went into today’s meeting with the difficult task of trying to ‘out-dove’ or at least match the market’s already very dovish expectations. Judging from the statement and the new set of projections, they seem to have succeeded,” said Anna Stupnytska, global economist at Fidelity International.

The Fed, as expected, maintained its interest rate target of 2.25 per cent to 2.5 per cent at its latest policy meeting. Investors have been betting that Fed officials would put rate rises on hold for all of 2019 amid muted inflation growth, trade uncertainty and global economic headwinds. In December, policymakers had pencilled in two increases to their rate target.

A majority of officials now expect no rate rises in 2019, followed by one in 2020, and the Fed updated its economic projections to forecast slower domestic GDP growth this year and in 2020. It also announced a plan to begin slowing its balance sheet reduction in May and conclude the runoff in September.

“The [Federal Open Market Committee] on Wednesday signalled that it in all likelihood has ended its policy normalisation campaign,” said Joseph Brusuelas, chief economist at RSM US. “The FOMC is attempting to engineer a soft landing for an economy that rapidly decelerated during the first quarter of 2019 amid global economic headwinds, volatility across asset space, and policy risks associated with US trade policy.”

ING chief international economist James Knightley said the Fed’s updated forecasts for rates and the US economy “indicate that the Fed will be very, very patient”:

We had been thinking that a September rate hike from the federal reserve remained on the table given our belief that the US growth story was underpinned by a strong jobs market and rising worker pay and the expectation that in the coming months we will get a positive resolution to the US-China trade dispute. Indeed we continue to think the US economy can expand in excess of 2% this year with Jay Powell also talking of “very strong” economic fundamentals. We additionally expect core inflation to grind higher to above 2.5%. However, this does not appear to be enough for officials and we will seemingly need to see even stronger figures to get the Fed to react.

Looser financial conditions and a Fed pause on rates “suggest a longer runway” for the current growth cycle, according to Kully Samra, vice-president of Charles Schwab. “However, uncertainty on the outlook for the world economy and ongoing trade tensions could keep business confidence and capital spending from rebounding, thereby leading to a hike sooner than expected,” he added.

Charlie Ripley, senior investment strategist for Allianz Investment Management, noted that erasing rate hikes from the 2019 outlook was a “dovish surprise” for investors who were braced for a rate increase later in the year.

“We interpret the Fed’s preference for patience, when it comes to making policy decisions, as one of timing which indicates the current hiking cycle hasn’t quite ended yet, but it may take some time before we see the next change in policy rates,” Mr Ripley wrote in a note to clients.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, suggested that one or more of the external headwinds currently weighing on economic projections must materialise in order for the Fed to keep rates in check. He said:

We expect a China trade deal soon, and a turning point in China’s cycle by midyear. We do not expect a Brexit crash-out, and we think Congress will avert the fiscal cliff implied by current spending plans by raising spending in the summer; 2020 is an election year, after all. Accordingly, we still expect the Fed to hike twice this year, in Sep and Dec. Ultimately, the Fed does what the data dictate; it’s all about wages.

Capital Economics believes the Fed’s downwardly revised economic forecast is still “too upbeat,” leaving policymakers to cut interest rates as their next move.

“With economic growth likely to remain below its 2% potential pace this year, we expect attention will soon turn to rate cuts. The markets are already pricing in one rate cut for 2020,” Michael Pearce, the group’s senior US economist, wrote. “We are sticking by our long-held forecast for 75bp of cuts in the first half of next year.”



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