The Federal Reserve holds its first meeting of the year this week and will release its Federal Open Market Committee (FOMC) and interest rate decisions on Wednesday. I expect policymakers to leave interest rates unchanged and signal that their “sit-tight” policy posture will continue for an extended period.
The Fed’s decisions are not likely to surprise investors since a number of U.S. central banking experts have come to the same conclusions.
In a January 20-23 survey of 12 top financial and economic experts, 100 percent of respondents anticipate that the FOMC will leave borrowing costs alone when they end their two-day interest rate decision in Washington on Wednesday. According to Bankrate.com, “Experts reported a confidence level of 97 percent.”
Furthermore, Richard Moody, chief economist at Regions Financial Corporation said, “Given the outlook for growth and inflation, there is no rationale for additional monetary accommodation at this point.”
If Fed policymakers do what they are predicted to do then it means the Federal Funds rate would hold in its target range between 1.5 percent and 1.75 percent.
The Fed is also expected to be very clear in its communications that it is pleased with maintaining the status quo for an extended period of time. In keeping with this theme, policymakers are expected to signal that rates are “likely to remain appropriate” at their current level, as long as the economy doesn’t change significantly. Experts believe the phrase will appear in both the post-meeting press conference and statement, as they did in their December monetary policy statement.
Holding policy steady is likely to remain the Fed’s marching order for nearly half the year. According to the CME Group’s FedWatch tool, the Fed is expected to sit on its hands during the first five meetings of the year. However, the futures markets indicate that Fed officials are expected to start trimming rates again later in the year. The data predicts rate cuts at the Fed’s November and December meetings.
Traders should also expect the Fed to say it will be watching the data closely, judging the impact of the rate cuts and determining whether more action might be needed. Fed Chairman Jerome Powell may emphasize the central bank is not on a preset course.
At this meeting, the focus for many experts will be what it will take for Powell and his policymakers to move interest rates in either direction. Investors are hoping Powell offers some insight into those factors.
As far as a rate hike is concerned, Fed officials have already noted that they’d like to see inflation pick up first. When it comes to trimming rates again, many of the geopolitical tensions that prodded the Fed to take action last year have calmed down. These include the U.S.-China trade deal and the revised trade agreement between the U.S., Mexico and Canada.
Essentially, it looks as if the Fed will maintain rates at current levels until it gets clarity on these trade deals and see how they have impacted the economy.
This article was originally posted on FX Empire
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