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On 19 December 2018, the Federal Open Market Committee said in its official statement that: “Some further gradual increases in the target range for the Fed funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s 2% objective.”
In its very next official statement, delivered on 30 January 2019 (only 41 days later), that sentence was gone. Instead, it was replaced by: “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”
In other words, in only six weeks, the Federal Reserve has gone from ‘the economy may be running too hot’ (or economic policy is too loose) to ‘we are concerned about the global economic growth’ (or economic policy is neutral and may well be too tight).
During the December press conference, Fed Chair Powell said: “I think that the runoff of the balance sheet has been smooth and has served its purpose. And I don’t see us changing that. And I do think that we will continue to use monetary policy, which is to say rate policy, as the active tool of monetary policy.”
January’s FOMC ‘Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization’ said instead: “The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.”
In other words, the balance sheet run-off ’autopilot’ has been switched off. In December, the US stock market had made it very clear to the Fed, that its balance sheet policy was scaring investors. The market reaction to the January statement was a huge sigh of relief.
Meanwhile in Frankfurt, on 24 January, ECB Governor Draghi acknowledged that “persistence in uncertainties, in particular related to geopolitical factors, is weighing on sentiment.” He also said that the expectation is for borrowing costs to stay at present levels through the summer and that the ECB will continue to reinvest proceeds from maturing bonds for “an extended period of time past the date” of any ECB’s first rate increase (if that date ever arrives).
So is all now well with the world? The fact that the Fed’s change to a more dovish stance is taking place with rates at 2.5 per cent in the US (and negative in Europe) highlights just how marginal economic growth has become.
2019 looks as if it might provide a bumpy ride for investors.
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