The final Fed rate decision of this decade saw rates kept on hold
The Fed’s final interest rate decision of 2019 did not surprise many market participants. The policy rate remains at 1.5% – 1.75% and, unlike the previous FOMC meeting, there were no dissenters.
Interestingly, Powell also indicated that there was unlikely to be any changes to this policy rate throughout 2020. The market’s reaction was initially hawkish, however it quickly saw more dovish moves. It is clear that Fed is in no rush to reverse the three ‘insurance cuts’ carried out in 2019, even if the economy picks up momentum and the chances of a recession fade. Powell also said that he wanted to see a significant and persistent move up in inflation before an interest rate hike. Therefore, the criteria for the next rate hike is substantial as the US has been experiencing relatively benign inflation for a prolonged period of time.
This dovishness was reflected in the ensuing market moves; US stocks and Treasuries saw gains, with the S&P 500 rising by 0.29% and the yield on the Treasury note fell below 1.8% (Financial Times).
As oppose to a rate hike, I see the chance of a further rate cut as a more likely outcome in 2020. Several geopolitical risks still persist, including the viable threat of another round of escalation in the US-China Trade War that would weigh on an already sluggish global economy.
The update Fed Dot Plot matrix confirms this. The median projection line is noticeably shallow, indicating that rate changes going forward will only be very gradual. This makes sense given the issue of persistent lagging inflation; markets believe that even in five years, US inflation will not exceed 1.8% (Financial Times).
