FOMC meeting: From “Powell Pivot” to “Powell Pause”

As widely expected by market participants, the Fed voted unanimously to leave interest rates unchanged at the December FOMC meeting – the Fed funds rate stands in a range of 1.5-1.75% and the interest rate on excess reserves remains at 1.55%. The biggest change in the FOMC statement was the inclusion of the mention that “the current stance of monetary policy is appropriate” to sustain expansion of economic activity, strong labor market conditions, and inflation near 2%. The statement also removed reference to “uncertainties” regarding the outlook. During the press conference, Chairman Powell especially highlighted that some uncertainty around trade would be removed from USMCA (the agreement reached on Nafta trade deal replacement has been approved by Democrats in Congress).

In-line with the rate pause, the Dot-Plots are collapsing and signal no action in 2020. Like in the September projections, the Fed still sees one hike in 2021 and one hike in 2022 and reiterates its data-dependent approach adding that not a single factor influences monetary policy.

One of the most interesting aspects of the FOMC meeting was the release of the latest Summary of Economic Projections. GDP and inflation forecasts were unchanged and are aligned with the market narrative (inflation under 2% and lower growth), but unemployment rate for 2020 was cut to 3.5% - a level where we see slack in the labor market - versus a previous forecast at 3.7%.

To sum up, the FOMC considers the US economy is in a good place, and monetary policy is positioned well, unless something unexpected happens.

Discussion on the latest developments in the repo market

One of the biggest themes during the Q&A session was the recent developments in the repo market and the growth of the Fed's balance sheet. In less than three months, 2019 Quantitative Tightening has been completely erased due to the turmoil in the repo market.