Columbia Threadneedle: comment on FOMC meeting

December 18, 2018

Dave Chappell, Senior Portfolio Manager, Fixed Income at Columbia Threadneedle Investments, discusses tomorrow’s Federal Open Market Committee (FOMC) meeting:

“Currently, the Federal Reserve’s SEP median ‘Dots’ signal a total of three rate hikes in 2019, with one additional increase in 2020. A subtle change of rhetoric in recent weeks increases the possibility of a shallower path of hikes ahead, when the FOMC meets on Wednesday for the final time this year, and releases its latest macro and rate forecasts. It has long been our view that the Fed would look to adjust the Funds rate to 3%, before pausing to assess the lagged effects of monetary tightening. The ‘dot plot’ indicates the potential for a move into restrictive policy, but as the effects of fiscal stimulus fade, to be superseded by a tightening of financial conditions, it seems likely that some members may feel inclined to lower their projections. The subdued behaviour of inflation should also give members reassurance when considering their forecasts.

At the start of October, Chair Jerome Powell added to the upwards pressure on yields when he described the current level of the Fed Funds rate as ‘a long way from neutral’. This was understood by many as signalling an extended path of tightening, leading to a repricing in the Federal Funds futures curve. We took his comments as nothing more than stating the facts. With the present Fed Funds rate at 2.25%, it would take six FOMC meetings, or eight months at the current pace, to the mid-point of the 2.5% to 3.5% long term neutral rate forecast. Powell spoke again in late November, this time choosing to describe the current Fed Funds rate as being ‘just below’ the lower end of the neutral range, repeating Vice Chair Richard Clarida’s comments only days before. Once again, a factual description of the current rate, but this time read as a shift towards a more dovish stance, driving markets to reduce tightening activity next year.”