January Fed Meeting: Reaction, Expectations

The FOMC kept the federal funds rate in line with expectation, unchanged from the December meeting. This move has been a welcome surprise to Wall Street considering the large shifts in policy made by the Fed in 2019.

There are still some important takeaways from Chairman Jerome Powell’s statements that can offer guidance to the expected path of future interest rates. In addition to the interest rate decision, 2019’s GDP figures from the Commerce Department were released. Those numbers, like the FOMC decision, were largely aligned with expectations.

FOMC Press Release

The Fed’s statement was largely unchanged from the one released in December. The Fed is content with sticking to its ‘wait-and-see’ interest rate policy, still concerned with the lack of inflation given interests rates and unemployment are historically low.

The central bankers’ assessment of the economy noted that exports and business investment remained low and growth in consumption has pulled back from its strong pace in December. In addition, the coronavirus, which is rattling stock markets across the globe, is also on the Fed’s radar. The outbreak was mentioned multiple times in the press conference following the interest rate decision, and it seems that the Fed will be monitoring its implications on the U.S. economy moving forward.

Fourth Quarter GDP

In a big week for U.S. economic data, the Commerce Department released GDP figures on Thursday. Fourth quarter GDP was unchanged from third quarter, as it came in at 2.1%. This makes 2019’s total GDP gains of 2.3% the slowest rate since 2016. Although this data may be disappointing, it was in line with CBO and Federal reserve forecasts from the beginning of the year.

One notable difference from last quarter is, as mentioned above, that growth in consumer spending is falling despite steady gains in the labor market. This might signal that the U.S. consumer is acting with a little more caution going into 2020. The housing sector added to GDP at the strongest pace in two years, but private investment continued to contract amid a still uncertain global political and economic atmosphere.

On a positive note, trade posted its biggest boost to the economy in a decade. Net exports grew substantially in quarter four driven primarily from a massive drop in imports, a product of the White House’s tariffs with many large trading partners. How this number may react to trade deals in with Canada, Mexico and China, our three largest trading partners by volume, is yet to be seen.

Should we expect more of the same?

The short answer is yes. Both the Federal Reserve and the Congressional Budget Office are predicting similar levels of GDP growth in 2020, being 2% and 2.2% respectively. The Fed’s forecast for interest rates contains no changes to the federal funds rate in 2020, reflecting the high bar that the Fed has set on future interest rate movements.

With some of the headwinds that stalled growth in 2019 subsiding, coupled with a new trade deal with China and an uptick in data related to the manufactured goods sector, there are reasons for cautious optimism going into 2020. On the other hand, uncertainty around impeachment and the outbreak in China could provide more catalysts for interest rate adjustments to the down-side.

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