FOMC Maintains Short-Term Rates, Reiterates Patient and Flexible Approach

Gary Pzegeo, CFA
January 30, 2019

The Federal Reserve left the target range for federal funds at 2.25% to 2.50%, as expected by markets. Implied probability of any change prior to today’s meeting has been close to 0% since the last FOMC meeting on December 19.

The Federal Reserve left the target range for federal funds at 2.25% to 2.50%, as expected by markets. Implied probability of any change prior to today’s meeting has been close to 0% since the last FOMC meeting on December 19. The Fed has adopted a more dovish approach to policy to counter balance much tighter financial market conditions in the weeks leading up to this meeting. Chairman Powell also conducted a post-meeting press conference, which is now a regular feature of the Fed’s communication approach. Today’s release included a statement regarding longer term policy implementation and normalization of the size of the Fed’s balance sheet. 

Here is a summary of today’s releases:

Growth & Inflation – most of the language describing the state of the economy was identical to the December release.  Economic activity has been solid, job gains and household spending have been strong, and business spending has moderated from a high level of growth.  One notable difference is a reference to lower market-based measures of inflation risk in recent months.  For example, the implied rate of inflation embedded in 10-year Treasury Inflation Protected Securities (TIPs) fell from 2.14% on September 30th to 1.71% on December 31st.

Forward guidance – the committee dropped language used in December regarding projections for some further gradual increases in target rates.  Instead, the Committee will be “patient” in determining future moves in light of global economic and financial developments.  The release covering balance sheet normalization indicated that the Fed is making some progress on determining the appropriate level of reserves and that it would like to have more than enough reserves on hand rather than use the balance sheet as an active policy tool.

Today’s statement was another in a series of statements (here and here) by the Fed and the Chair to calm markets and to project a message of patience and flexibility in conducting monetary policy.  Credit markets are responding to the Fed’s confirmation of a more dovish stance in a predictable manner.  Shorter-term yields are moving lower while the 30 year Treasury yield is higher in a classic reflationary steepening of the yield curve.  TIPs are outperforming nominal fixed rate securities and credit spreads are tightening.  Riskier assets are generally extending gains.

Gary Pzegeo joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.