Pause confirmed

At its last monetary policy meeting this year, the US Federal Reserve left the key interest rate corridor unchanged and confirmed the pause in the current key interest rate cycle that we had expected. The economic outlook was described as solid. In particular, the labour market is robust. As usual, the Fed press statement was changed only slightly compared to the last meeting. The Fed stated that it would continue to closely monitor the outlook for the economy and inflation, including global developments. The phrase that there was uncertainty about the economic outlook, however, was deleted. The current level of key interest rates was appropriate. The latest statement is therefore slightly more optimistic than the previous communiqué.

The Fed members‘ interest rate expectations, which are reflected in the so-called dot plot, were again exciting. In September, the projections of the individual FOMC members indicated that the interest-rate pause would continue until 2021 and that a tightening of monetary policy would then be on the agenda. The currency watchdogs have stuck to this message, although the level is now lower due to the interest rate cut in October. Overall, the interest rate decision was taken unanimously.

At the press conference, Powell once again underscored the Fed’s wait-and-see stance. Powell stressed that the economic situation had to change significantly for the Fed to adjust its current monetary policy orientation. In particular, the inflation rate would have to increase significantly for the Fed to raise key rates again – which the currency guardians expect according to the dot plot in 2021. The press conference asked several questions about the inflation trend and the revision of the monetary policy strategy. A significant increase in the inflation target was off the table, but there were no more concrete indications of a new monetary policy strategy. The journalists also addressed the money market bottleneck on several occasions. Powell put on record that he was convinced that the measures initiated would have an effect. At the same time, he stressed that the Fed was open to expanding its security purchases if necessary or to buying other (short-term) securities. A permanent facility was not ruled out. Powell said, however, that the Fed is currently more interested in buying short-term securities and repo transactions (some of which are longer-term).

Overall, we maintain our assessment that the US Federal Reserve will initially pursue a wait-and-see monetary policy. However, in view of the continuing political and economic uncertainties in the coming year, the US Federal Reserve is likely to loosen interest rate restraints again in early summer 2020.

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