The Federal Reserve’s monetary policy-setting body meets this week to take the pulse of the U.S. economy and decide whether its health is best served by an interest rate hold, hike, or cut.
Experts interviewed by The Epoch Times broadly agreed that when members of the Federal Open Market Committee (FOMC) meet on Jan. 28-29 to consider adjustments to the central bank’s benchmark interest rate, they will almost definitely rule to maintain the Federal Funds target within the current 1.5 to 1.75 percent range.
“I believe there will be no change in the benchmark rate and essentially no changes in the Fed statements compared to those released after the last Fed meeting,” said Robert R. Johnson, Professor of Finance at Heider College of Business, Creighton University.
“The Fed is on hold with interest rates until they’re compelled to act further,” said Greg McBride, Senior Vice President and Chief Financial Analyst at Bankrate. “Realistically, as long as economic growth holds near 2 percent the Fed could be on the sidelines throughout 2020. There needs to be a definitive slowdown before they cut rates again and they’ve set the bar even higher for a rate hike—a significant and sustained increase in inflation. That might reveal itself later this year but for now its ‘steady as she goes’ on interest rates.”
But while the near-term consensus of the interviewees is tight, there are signals that the further America moves along its 2020 business cycle, the more likely there is to be a shift in policy.
“The FOMC is likely to stay on hold because economic data has not changed materially since last month’s meeting,” said Allen Sukholitsky, Founder and Chief Macro Strategist at Xallarap Advisory, in a statement to The Epoch Times. “However, investors should note that, as of today, the market is pricing in a greater likelihood of two cuts than no cuts, by next December’s meeting.”
“Our base case is for two cuts this year, with a higher probability of three cuts than one cut,” Sukholitsky added.
Johnson, by contrast, argued there was a greater chance of the Fed tightening than loosening monetary policy.
“According to the CME’s Fed Watch Tool, there is an 89.5 percent chance that rates will remain unchanged and a 10.5 percent chance that the Fed will announce a quarter-point rate hike,” he said, adding the caveat that the turbulence caused by the coronavirus outbreak likely dampened FOMC enthusiasm for a rate hike.
“Additionally, the political situation in the U.S. makes it extremely unlikely that the Fed will make dramatic changes to monetary policy, as it doesn’t want to be seen as playing politics in an election year,” Johnson added.
The Fed has been wary of allowing inflation to run too cool, afraid of pushing the public’s price growth expectations lower and landing in a Japan-like zone of persistent economic stagnation.
In a Dec. 11 press conference following the most recent FOMC meeting, Fed Chairman Jerome Powell warned that inflation running below expectations could sap sentiment and nudge the economy into a downturn.
“While low and stable inflation is certainly a good thing, inflation that runs persistently below our objective can lead to an unhealthy dynamic in which longer-term inflation expectations drift down, pulling actual inflation even lower,” Powell said (pdf).
He expressed dissatisfaction that “inflation continues to run below our symmetric 2 percent objective.”
Still, at its December meeting, the FOMC voted to keep the benchmark interest rate unchanged. At three earlier meetings, however, and spurred by economic headwinds, committee members slashed the target federal funds rate by a quarter percentage point each time.
The FOMC minutes (pdf) showed committee members highlighting risks to the economic outlook from global economic softness and below-target inflation in the United States.
“Global developments, related to both persistent uncertainty regarding international trade and weakness in economic growth abroad, continued to pose some risks to the outlook, and inflation pressures remained muted,” the committee said, according to the minutes.
Fed policymakers suggested they might let inflation run hot, with the minutes showing FOMC policymakers would be reluctant to hike rates in the event of “modest deviations of inflation” above the 2 percent target, as this “could be helpful for cushioning the economy from the global developments that have been weighing on economic activity and for returning inflation to the Committee’s symmetric objective of 2 percent.”
“Participants generally expressed concerns regarding inflation continuing to fall short of 2 percent,” the minutes indicate.