There is virtually no expectation that the March 19-20 FOMC meeting will conclude with any decision regarding interest rate policy or that its contents will differ materially from the January 30, 2019 version when it is released at 14:00 ET on Wednesday. The labor market remains strong to all appearances, economic activity could still be said to be solid, and inflation “muted” with the core hovering around the Fed’s 2% objective and inflation expectations more-or-less on trend. It would be a surprise if the FOMC deemed its outlook for rates with anything other than continued “patience” against a number of economic and geopolitical uncertainties.
What markets will anxiously await is if the statement has one or two accompaniments. One is certain, the other possible.
The March meeting will see an update to the Summary of Economic Projections (SEP) materials along with the statement at 14:00 ET. It is roundly expected that the number of 25 basis point rate hikes implied in the midpoint of the fed funds rate at year-end 2019 will slip from the 2.0 of December 2018. Just how much remains to be seen. Some policymakers have indicated that they have lowered their growth projections for 2019, and thus should look for fewer reasons to increase rates. Revisions in the outlook in the SEP tend to be small and not result in more than incremental adjustments in the policy horizon. However, the change in policymakers’ rhetoric has been more downbeat since late December’s fairly robust assessment. It is possible a quarter’s worth of economic data will have a larger difference than usual.
It is not too soon to be on the lookout for the FOMC’s plans regarding ending the process of balance sheet normalization. Chair Jerome Powell and others have said the Committee is working on it and could release something “soon”. In Fedspeak that might be as late as the June 18-19 meeting if the second half of 2019 timeline is fairly firm. However, if the FOMC has reached its decision there is no reason to delay its release. An early release would be in keeping with the recent emphasis on communication and long lead times for markets to fully understand the implications of the changes. A lot of high-level Fed communications have made it clear it is on the way, so the surprise factor would be minimal.
See the Whetstone Analysis Reference Library for “Federal Reserve Balance Sheet Developments – LSAP (QE) implementation and normalization” for a timeline and details of past decisions.
Chair Powell’s press briefing is scheduled to start at 14:30 ET on Wednesday. At his January 30 press conference, he was bombarded with questions about the balance sheet. That is very likely to be the case this time around as well, whether or not the next phase of the balance sheet plan is announced. However, the SEP will probably get the initial round of questions that will elicit the usual cautions that monetary policy is not on a preset course, that the FOMC is data-dependent in its decision making, or that the forecast is not a promise of a particular path or timing for monetary policy. Secondary to this is that the Fed’s primary tool for adjusting monetary policy is short-term rates and that changes to the balance sheet should not be interpreted as a move to do so. Rather, the FOMC consensus is that the size of the balance sheet will be about right later in 2019 for its decision to commit to the “abundant reserves” and “administered rate” framework for monetary policy.
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