Global Daily – Fed lowers rate guidance and emphasises data dependence

by: Bill Diviney

Fed View: Pushing back against tightening financial conditions – The FOMC raised the target range of the federal funds rate by 25bp, to 2.25-2.50%, as was widely expected. In addition, and as we had flagged in our preview, the Committee did three things: 1) it lowered its rate hike guidance for 2019 to two hikes from three hikes via the ‘dots’ projections; 2) it added the qualifier ‘some’ to its expectation of further rate increases, to suggest rate hikes are nearing an end; and 3) it lowered its estimate of the neutral rate, to 2.8% from 3.0%. The Committee also made a (widely expected) technical adjustment to the interest on excess reserves rate (IOER), raising it 20bp to 2.40% rather than by 25bp as it would normally do, in order to better anchor the fed funds rate more firmly within the target range.

In the press conference, Fed Chair Powell sounded upbeat on domestic economic conditions in the US, while also noting ‘cross-currents’, chiefly in the global economy, that are leading to increased uncertainty over the economic outlook. He also, on numerous occasions, referenced the tightening in financial conditions resulting from equity market falls, and even explicitly pointed to the Fed’s lower rate hike trajectory as ‘pushing back’ against that tightening of conditions.

While sounding a more cautious tone on the outlook, Chair Powell also emphasised the data dependency of future rate hikes. Using the example of 2018, where at the beginning of the year the Fed had forecast three rate hikes but ultimately delivered four, he sought to underscore the importance of changing circumstances in informing policy decisions, almost downplaying the relevance of the dots projections in the current climate. This is consistent with his previously expressed view that forward guidance is becoming less relevant than earlier in the economic cycle, and implies that market participants should put less weight on FOMC expectations, and more weight on incoming data than has been the case until recently.

All told, we continue to think the Fed will deliver just one rate hike in 2019 – likely at the March meeting – before a prolonged pause. The precise timing will depend not just on economic growth – which we expect to slow gradually – but also on whether the current period of market volatility persists into next year. Should market sentiment fail to stabilise, any additional tightening could get pushed back to June, or beyond. (Bill Diviney)