Fed could reduce rates in March – UOB

Senior Economist at UOB Group Alvin Liew, assessed the recent FOMC event.

Key Quotes

“The Federal Reserve as widely expected, kept its policy Fed Funds Target Rate (FFTR) unchanged at the range of 1.50-1.75% at the 28/29 January 2020 Federal Open Market Committee (FOMC) meeting with a unanimous decision (10-0).”

“The FOMC statement had two highlights; 1) the Committee ‘judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to [from ‘near’ in the December 2019 FOMC] and 2) the downgrade of US household spending which ‘has been rising at a moderate pace’ [from ‘a strong pace’ in the December 2019 FOMC].”

“FOMC Chair Jerome Powell later explained during his post-FOMC press conference that the change in inflation language in the FOMC policy statement reflected the need for a clear signal that the Fed does not want inflation persistently below 2%, with Powell emphasizing the Fed’s dissatisfaction with inflation running below 2%.”

“In contrast to the market view of a more prolonged Fed pause, we still expect the Fed to implement the next 25bps rate cut in 1Q 2020 at the March FOMC as another insurance cut in view of the potential risks of US trade policy, Middle East geopolitical tensions and the latest being the coronavirus outbreak in China. Conversely, if all these risk factors do not materialize, then the ‘insurance’ cut will be unnecessary. The view remains for the Fed Reserve to keep policy rates low or even lower in 2020.”