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Jan ’20 Preview – Wait & Watch Mode Prevails

Jan 29 2020, 08:21 PM (+06) | Orbex.com

The Federal Reserve Bank will be concluding its two-day monetary policy meeting today. Heading into the interest rate decision, the consensus is loud and clear that the Fed will not tinker with the Fed funds rate, leaving them steady at 1.50%-1.75%.

This comes as policymakers have a lot to think about, including some recent developments that will compel them to remain on the sidelines.

Most importantly, the Phase One trade deal with China gives officials some breathing room. Further trade negotiations will continue only after the US elections, meaning that trade tensions will ease. This should potentially give enough time for the US economy to pick up momentum over the course of time.

Investors will be more interested to hear about the Fed funds rate path. The Fed signaled at the December meeting that interest rates will remain steady this year.

But this could change, subject to the incoming data. Investors, on the other hand, remain cautious. There is a slight consensus that the Fed is more likely to cut rates than keep them on hold this year.

GDP growth for the fourth quarter remains anchored on average to a two percent growth rate. While this is a full percentage point lower compared to the previous quarters this year, the pace of growth is still acceptable.

However, what remains to be seen is whether other factors such as inflation and wage growth will pick up.

Economic Risks Remain Unbalanced

One of the most important factors for the Fed is the imbalance in the markets. Equities have been charting to new highs. Yet, when it comes to growth, it is a different story. The US labor market remains one of the bright spots for the Fed.

But wage growth is sluggish, rising at an annual pace of around 2.9%-3.0%. For the moment, with inflation staying sluggish, wages are outperforming inflation. But with no upside risks, this could begin to be a cause for concern among Fed officials.

Another lesser-known fact is the Fed’s open market operations. Besides injecting liquidity into the overnight markets, the central bank is also buying the US T-Bills.

Recently, Larry Kudlow, the economic adviser to President Trump made claims that the Fed purchase of T-Bills amount to nothing short than QE.

The Fed is purchasing close to 60 billion in Treasury bills every month. While policymakers maintain that this is merely a technical measure to support the monetary policy, others have a different view. The fact that the Fed’s balance sheet is also growing is another indication.

In the near term, today’s Fed meeting will be just another placeholder meeting. But things could change into the coming quarters. Investors will be keen to see if the dissipating trade tensions will revive growth.

The International Monetary Fund maintains a pessimistic view of the global economy. Furthermore, with Brexit now a very likely thing, trade with the UK and the rest of the world will also play a big role. The US has already started talks with UK counterparts.

Impact of the Fed Rate Decision

The impact of the Fed meeting is not likely to be much from a trader’s perspective. It is quite likely that the Fed will maintain a cautious tone at today’s meeting. This could potentially give rise to a flight to safety.

Gold prices are already discounting this fact, given that price hasn’t budged off the current highs. Secondly, investor concerns now focus on the impact of the Coronavirus outbreak as well. Overall, today’s Fed meeting will perhaps give a clue into where the Fed stands on the monetary policy path.

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