Columbia Threadneedle: Comment ahead of Fed meeting

Columbia Threadneedle: Comment ahead of Fed meeting

March 20, 2019

Outlook

By Dave Chappell, Senior Portfolio Manager Fixed Income

The FOMC statement and revised forecasts are unlikely to surprise today, following the abrupt switch in rhetoric from most members of the committee in recent months. After the removal of any directional guidance for the future path of the Fed Funds rate at the January meeting, the committee will be careful to maintain the current overriding themes of ‘patience’ and more recently ‘flexibility’.

We expect an acknowledgement of the recent slowing of growth momentum, but also confidence that the economy remains in ‘good shape’. With inflation remaining subdued and rates within the range of neutral, the Fed can move to the side-lines, to better gauge the potential impact of ‘crosscurrents’ from global factors. And after successfully orchestrating a shift recovery in risk markets, and with it an easing in financial conditions, it will hope for a limited response today from markets in either direction.

We expect the ‘dot’ plot to flatten, with the 2019 median dot signalling just one additional hike to 2.5-2.75%, where it will likely remain through the forecast period, although one further hike in 2020 cannot be fully ruled out. Our opinion is that the Fed will find it difficult to hike again this cycle, unless higher wages finally begin to feed into core inflation in a meaningful way.

Finally, the committee may deliver an update on the procedure to cease the reduction of the size of the balance sheet. Having been sanguine about the effects of the QT programme up until December, with Chair Powell describing it as on ‘auto-pilot’, an additional release may crystalize the end date and whether or not the pace of redemptions will be tapered.