As generally expected, the Fed left its key rates on hold at yesterday’s meeting. The press statement published in the wake of the interest-rate decision points to a considerably more cautious monetary-policy stance than in earlier months. For example, the Fed’s policymaking committee went on record as saying that they intend to be “patient” with regard to further key rate hikes. Furthermore, the passage in the FOMC Statement providing guidance on the direction of the next monetary-policy step was formulated in a very open way: depending on the future path of inflation, the economic trend and geopolitical circumstances, FOMC members will either raise or lower its key rates. They have signalled at the same time that more flexibility will be allowed in future in terms of normalising the Fed’s balance sheet, arguing that they could stop shrinking the balance sheet if that were warranted by economic developments. This is a significant change relative to previous statements: up to now, balance-sheet reduction was on autopilot.
At the press conference, meanwhile, Dr. Powell continued to assess the overall outlook as being very positive. However, the Fed Chairman did point out that prospects for the US economy are being overclouded by uncertainties, especially from abroad. What is more, he noted that financing conditions have deteriorated of late, allegedly as a consequence of previous interest-rate increases by the Federal Reserve. Powell stated quite clearly that monetary policy has now moved into “wait-and-see“ mode, arguing that the risk of a less solid economic outlook has increased, on the one hand, while the danger of a pronounced surge in inflation has faded of late, on the other. This, he concluded, has opened up leeway for the Fed to hold out the prospect of a longer pause in the rate-hike cycle. The immediate reaction of equity markets to the announced interruption in the hiking cycle was highly positive, while yields on US Treasuries fell across the entire yield curve. All things considered, both the Fed statement and the press conference surprised on the dovish side.
The Fed is currently in a phase in which it can afford to lean back and wait to see how economic developments shape up. In our opinion, this self-imposed pause will usher in the end of the rate-hike cycle. After all, the monetary-policy conditions in many countries are implying that downside cyclical pressure in the economies of important trading partners will tend to intensify rather than abate. Simultaneously, the positive effects of the US tax reform are slowly dissipating, and the US president is going to find it difficult to push through further fiscal-policy stimuli in the coming months in the face of a politically divided Congress. Cyclical momentum ought therefore to prove considerably lower in the present year than in 2018. Provided that inflation does not climb to an unexpectedly sharp extent, we think that the Fed will dispense with further tightening steps.