A little after the US Fed’s Open Market Committee (FOMC) raised the federal funds rate range in early December, a change in attitude took place among fund managers, traders, economists and other observers. Instead of expecting more rate increases through 2019, they started to move towards the idea the Fed would probably pause, or even finish, this cycle of rate rises. The US-China trade war, the end of some temporary tax breaks and the US federal shutdown had all added to a new-found uncertainty which was not conducive to a strong economy and higher official interest rates.
Through the rest of December and January, US bond yields fell and the US yield curve flattened, traditional signs of an impending economic slowdown. Expectations of further rates rises out of the FOMC began to be discounted, then pushed aside totally. By the beginning of February, federal funds futures implied there would be no more rate rise in 2019. What’s more, they also implied there was also some small chance of a rate cut at the FOMC’s December meeting.
The latest meeting of the FOMC was held over two days from 29 January 2019. No rate changes were announced at the time but the accompanying statement included some alterations which pointed to a pause in future rate rises. Nothing regarding the Fed’s balance sheet was mentioned.
Now the minutes of the meeting have been released, both these issues have been clarified to some extent.
Regarding future rate rises, the minutes stated “…members continued to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective as the most likely outcomes for the U.S. economy in the period ahead.” However, given “global economic and financial developments and muted inflation pressures, the Committee could be patient as it determined what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.” In other words, things were going well but the FOMC would no longer be automatically raising the official rate every quarter.