The whirlwind of Trump policies has taken the spotlight off the Federal Reserve’s path for monetary policy since its 14th December meeting at which it hiked rates 25bp.
Mixed US macro data and acute policy and economic uncertainty have likely cemented a pause at today’s Fed policy meeting, as priced in by the market.
However, today’s Fed meeting is significant as US yields and Dollar have edged lower year-to-date, in line with my expectations that the hawkish pendulum had maybe swung too far.
Moreover, today’s meeting – the first since President Trump was inaugurated – will see four new regional bank Presidents, with an arguably more dovish bias, take over from James Bullard, Esther George, Loretta Mester and Eric Rosengren.
I would expect the Fed’s policy statement to highlight the marginal strengthening in the labour market but also the slowdown in GDP growth in Q4, weak housing data in December and still very modest rise in inflation and inflationary expectations.
The Fed may also chose to emphasise the importance of domestic conditions, indicators and developments when setting interest rate policy, a very subtle nod to the increasingly acute uncertainty which the Fed currently faces.
Finally, the ten voting FOMC members are likely to unanimously vote in favour of rates remaining on hold.
I see no compelling reason why, at this juncture, the Fed would want to guide US yields (or the Dollar) beyond their year-to-date ranges. At the margin, the risk is that the Fed tries to stabilise yields, particularly at the long-end of the curve, with an eye on keeping open the possibility of a March rate hike.
Until the Fed has tangible evidence that macro policy-promises are being enacted and it has conducted an initial evaluation of these policies’ possible impact on the US economy, the Fed may disappoint market participants expecting a marked step-up in the hiking cycle from the one-a-year hikes delivered in 2015 and 2016.