US Fed Policy Outlook

The FOMC meets today and tomorrow for the second policy meeting of the year and will issue its post-meeting statement at 18:00 GMT on Wednesday. This will be followed by Chair Powell’s post-meeting press conference at 18:30 GMT.

In the FOMC meeting the attention should be centered on the completion of balance sheet normalization as well as new economic and rate projections, since the Fed is universally seen keeping rates on hold, as supported by limited inflation pressures.

FOMC Forecast revisions with the FOMC statement, will reveal the extent to which the Fed has changed its outlook or “reaction function” since the December FOMC meeting, beyond the change in rhetoric.  While a lot of the verbiage and some of the forecasts will reflect the dovish pivot, it is expected that Fed will not proceed on any policy action even if many Fedwatchers, see a cut as the next move.

Meanwhile, the dot plot median is likely to ratchet down from the two tightenings projected in December to just one this year. Even though many of the long standing hawks, including George and Rosengren (current voters) have supported the patient stance, it is unlikely so far that other Committee members’ overall outlooks on the economy have eroded sufficiently for them to abandon tightening forecasts altogether.

Fed patience should prevail in the face of benign inflation and a strong labor market, as even though real growth did slow over the second half of 2018, it was not as woeful as it was expected to be. Developments in the economy should remain close to the Fed’s outlook for growth. If the data continue to come in as expected, the Fed is seen raising rates once in 2019, the next time possibly as soon as the June FOMC meeting, with risk that the Fed will wait until September.

A modest trimming in the 2019 GDP central tendency is anticipated to fall to 2.2%-2.4% from 2.3%-2.5%. The 2019 jobless rate central tendency should remain at 3.5%-3.7%, versus the 3.7% forecast. Additionally the 2019 central tendency should be narrowed to 2.4%-2.6%, signalling a good chance of one tightening this year (many on the Committee have suggested as much), versus the prior central tendency of 2.6%-3.1%.

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Andria Pichidi

Market Analyst

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