FOMC: What does patient really mean?

Thought of the day

by Chief Investment Office 20 Mar 2019

Global equities have rallied 18% since their December lows, helped in large part by a shift to a more accommodative central bank policy stance led by the Federal Reserve.

But there are still uncertainties. Rhetoric on US-China trade has become more contradictory, and recent economic data has weakened. The Federal Reserve FOMC is meeting today, and investors will be looking for signs that policy will remain supportive. We will be watching for the following:

  • The Fed’s language. The statement and Fed chair Jerome Powell’s press conference will be scrutinized for signs about how long its “patient” stance will last. Comments from Fed officials have suggested it could be for several months. We will be looking at the Fed’s assessment of the balance between economic strength and downside risks.
  • The Fed’s economic projections. The Fed may lower its forecast for GDP this year. The last non-farm payroll report was weak and 1Q GDP is tracking lower than when the Fed last made its growth projections. As a result the Fed may reduce its dot-plot of expected rate increases this year from two to one. This would bring the Fed in line with our own rate forecasts.
  • The Fed’s balance sheet. Fed officials have suggested that the central bank will announce when it will stop reducing its balance sheet soon, and could do so as early as today’s meeting. When the Fed was on “autopilot” last December, we expected the balance sheet run-off to end in March 2020. After the Fed’s change in stance, the market priced in at least partly an earlier end to QT, but an announcement this week would clarify Fed intentions. Most investors appear to be expecting the Fed to confirm its recent dovish stance, and could be disappointed by anything that hints at a resumption of monetary tightening. Against this backdrop we retain a moderately risk-on stance.

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