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US Dec FOMC Minutes: on Pause for “A Time”

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US Dec FOMC Minutes: on Pause for “A Time” Global Economics & Markets Research Email: [email protected] URL: www.uob.com.sg/research Macro Note US Dec FOMC Minutes: On Pause For “A Time” Monday, 06 January 2020 . In the latest minutes, markets did not get much new insights on what would change the outlook for the Fed Reserve policy rate trajectory. FOMC policy makers regarded current rate stance as likely to remain appropriate for ”a time”, helping to reinforce expectations for a Fed policy cycle pause after three sequential 25bps rate cuts in July, September and October but provided little else in Alvin Liew Senior Economist terms of new information. [email protected] . Similar to market expectations, we too subscribe to the view that the Fed Reserve will stay on Heng Koon How pause in its upcoming 28/29 January 2020 FOMC. But in contrast to the view of a more prolonged Head of Markets Strategy [email protected] Fed pause, we still expect the Fed to implement the next 25bps rate cut in 1Q 2020 which will be at the March FOMC, and thereafter to stay on pause again for the rest of 2020. The factors determining our Fed policy outlook is still the international trade developments and now, the additional factor of US-Iran developments. Conversely, if the trade negotiation progresses smoothly into 2020 and the US-Iran tensions does not boil over into a full-fledged military confrontation, then the “insurance” cut will be unnecessary. The view remains for the Fed Reserve to keep policy rates low or even lower in 2020. 10/11 Dec 2019 FOMC Minutes: Keeping Policy Steady For “A Time” The trouble brewing in the Middle East largely overshadowed the special Friday release of the 10/11 December 2019 Federal Open Market Committee (FOMC) minutes (4 Jan, Saturday 3am SGT) and markets did not get much new insights on what would change the outlook for the Fed from details of the minutes. According to the minutes, the Fed policymakers regarded current rate stance as likely to remain appropriate for ”a time” while a few policymakers raised the concern that keeping rates low for a long time could exacerbate imbalances in financial sector. Many policymakers saw risks to economic outlook as tilted to downside but that some risks had eased in recent months, and the more sanguine view of risks was owed to the easing US-China trade tensions, lesser probability of no-deal Brexit, and stabilizing global growth. The latest December (2019) Dotplot pointed to an unchanged Fed policy rate stance in 2020. Various participants were concerned that indicators were suggesting that the level of longer-term inflation expectations was too low and various policymakers remarked on topics for discussion at future meetings, including the potential role of a standing repo facility. The minutes also noted the topics for future discussion highlighted by the FOMC participants included setting of administered rates, and the long-run composition of Fed’s US Treasury holdings. US Dec FOMC Minutes: On Pause For “A Time” Monday, 06 January 2020 1 | P a g e History Of Past Projections – Fed Rate Policy Pause In 2020 According To December 2019 Dotplot 4.0 3.5 3.0 2.5 2.5 2.1 1.9 2.0 1.6 1.6 1.5 1.0 0.5 0.0 2019 2020 2021 2022 Longer Run Sep-17 Median Dec-17 Median Mar-18 Median Jun-18 Median Sep-18 Median Dec-18 Median Mar-19 Median Jun-19 Median Sep-19 Median Dec-19 Median Source: The Federal Reserve, Bloomberg, UOB Global Economics & Markets Research (As of 11 Dec 2019) Our FOMC Outlook – Another Pause For January, But Still Expecting Another Cut In 1Q The FOMC minutes reinforced expectations of another Fed pause in 28/29 January 2020 FOMC but otherwise had little in terms of new insights into the Fed Reserve’s thinking. Based on trading in futures and options data compiled by Bloomberg (WIRP) (as of 6 Jan), market’s rate pause expectations in January was higher to 94% (from an already high 93% on 3 Jan). We too subscribe to the view that the Fed will stay on pause in its first FOMC of 2020. But in contrast to the view of a more prolonged Fed pause, we still expect the Fed to implement the next 25bps rate cut in 1Q 2020 which will be at the March FOMC, and thereafter to stay on pause again for the rest of 2020. The boogie man for Fed policy outlook is still the international trade developments and the caveat for us is that another bout of US-China trade tensions post-signing of the Phase One trade deal (scheduled 15 Jan) could trigger another 25bps “insurance” rate cut from FOMC Chair Powell in early 2020, likely in March. And another potential factor to influence the Fed will be the geopolitical developments between US and Iran. It remains to be early days, but the US-Iran factor may encourage the Fed to lower rates further if it threatens US economic outlook. Conversely, if the trade negotiation progresses smoothly into 2020 and the US-Iran tensions do not boil over into a full-fledged military confrontation, then the “insurance” cut will be unnecessary. The view remains for the Fed Reserve to keep policy rates low or even lower in 2020. On the flipside, the Fed has set the handle very high for policy tightening, as there needs to be a materially significant rise in inflation for the Fed to go the opposite direction and start raising rates. Could high oil prices be a trigger? Possible but note that despite the more than 30% increase in WTI crude recorded in 2019, the US headline CPI inflation remained benign and some distance from the Fed’s 2% inflation goal. Moving into the new year, the composition of votes within the FOMC will change in 2020. FOMC Chair Powell and the four current Fed Board Governors, Richard Clarida (Fed Board Vice Chair), Randall Quarles (Vice Chair for Supervision), Lael Brainard and Michelle Bowman will remain as will the New York Fed President, John Williams who also has a permanent vote in FOMC. As for the four Fed Reserve Bank Presidents, Charles Evans, Eric Rosengren, Esther George & James Bullard will rotate out of their voting positions but will remain as non-voting participants attending the FOMC. US Dec FOMC Minutes: On Pause For “A Time” Monday, 06 January 2020 2 | P a g e Replacing them as voters in the 2020 FOMC will be Dallas Fed President Robert Kaplan, Minneapolis Fed President, Neel Kashkari, Philadelphia Fed President Patrick Harker (coincidentally all three are 2nd time voters as they were first time voters in 2017) and Cleveland Fed President Loretta Mester (most seasoned voter in group, 2014, 2016, 2018 FOMC). Kashkari is likely the most dovish among the four voting presidents while Mester & Harker are slightly hawkish and Kaplan is neutral. Their Projected Policy Inclinations Voters In 2020 FOMC Voting Status According to Bloomberg (as of Dec 2019) Chairman Jerome Powell Permanent Voter Mild Dovish (-1) Vice Chair Richard Clarida Permanent Voter Mild Dovish (-1) Vice Chair for Supervision Randal Quarles Permanent Voter Neutral (0) Fed Governor Lael Brainard Permanent Voter Neutral (0) Fed Governor Michelle Bowman Permanent Voter Mild Hawkish (+1) New York Fed President, John Williams Permanent Voter Neutral (0) Cleveland Fed President Loretta Mester Voter In 2020 FOMC Mild Hawkish (+1) Philadelphia Fed President Patrick Harker Voter In 2020 FOMC Mild Hawkish (+1) Dallas Fed President Robert S. Kaplan Voter In 2020 FOMC Neutral (0) Minneapolis Fed President, Neel Kashkari Voter In 2020 FOMC Most Dovish (-2) The next FOMC policy meeting will be on 28/29 January 2020 (decision on 30 Jan, 3am SGT) and will be accompanied by a Powell press conference but without an updated Summary of Economic Projections. But the immediate attention will be stay on US-Iran and the US-China Phase One trade deal headlines while the key US data will be this Friday’s (10 Jan, 9:30pm SGT) December Labor market report from the Bureau of Labor Statistics (BLS). Please click on the links to access the 10/11 December 2019 FOMC minutes and the FOMC calendar for 2020. % 06 Jan 1Q20F 2Q20F 3Q20F 4Q20F US Fed Funds Target 1.50-1.75 1.25-1.50 1.25-1.50 1.25-1.50 1.25-1.50 Source: UOB Global Economics & Markets Research forecasts (as of 20 Nov 2019). US Dec FOMC Minutes: On Pause For “A Time” Monday, 06 January 2020 3 | P a g e Disclaimer This publication is strictly for informational purposes only and shall not be transmitted, disclosed, copied or relied upon by any person for whatever purpose, and is also not intended for distribution to, or use by, any person in any country where such distribution or use would be contrary to its laws or regulations. This publication is not an offer, recommendation, solicitation or advice to buy or sell any investment product/securities/instruments. Nothing in this publication constitutes accounting, legal, regulatory, tax, financial or other advice. Please consult your own professional advisors about the suitability of any investment product/securities/ instruments for your investment objectives, financial situation and particular needs. The information contained in this publication is based on certain assumptions and analysis of publicly available information and reflects prevailing conditions as of the date of the publication. Any opinions, projections and other forward-looking statements regarding future events or performance of, including but not limited to, countries, markets or companies are not necessarily indicative of, and may differ from actual events or results.
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