When the Federal Reserve (Fed) meets later this week, policy makers are widely expected to deliver another rate cut. That would bring their policy target down to 1.5%-1.75%. That would be the third rate cut of 2019. But, beyond that, what are the markets expecting from the Fed in 2020?
One effective gauge of future Fed decisions has been the CME’s FedWatch Tool. Right now that’s suggesting that the Fed is likely to pause future rate actions for a while, at least into the first half of 2020 on most estimates, but then the risks then are likely to the downside, with the Fed having the potential to cut further should the economy weaken.
The Fed’s own dot plot from September takes a similar view. Many, but not all, policy-makers see another cut coming this year. However, into 2020 most Fed decision-makers believe rates are going up. That’s not unusual, central bankers do not want to be overly pessimistic in their assessment of the economy and future rate moves. That can spook markets and be potentially self-fulfilling. If the Fed expresses worry, markets likely will worry too.
Furthermore, the Fed’s strong intervention in the repo markets requiring an unscheduled press release earlier this month implied some fragility in the financial system, or at least a challenge to the Fed’s ability to keep rates low.
The Fed’s policy in 2019 has surprised many. Despite tame inflation and robust employment, which are the Fed’s two primary policy targets, the Fed has embarked on precautionary rate cutting. Yes, that has bought U.S. interest rates a little more in line with low rates globally. However, some of the trends that the Fed was worried about from Chinese trade to Brexit appear to have trended a little better in recent months. Also, though U.S. manufacturers remain challenged, U.S. weakness doesn’t appear to have spread beyond just a few sectors and the consumer sector and services appear reasonably healthy at this point.
So the Fed is in an interesting position. If the forecasts are correct then the Fed may pause after a cut this week. That would be unusual. Often when the Fed starts cutting and the yield curve inverts a recession can be on the cards in the medium term. However, just as the circumstances for the Fed to start cutting in 2019 were somewhat unusual, maybe the economic outcome will be too.
Reference: Forbes
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