FOMC Meeting Preview: Holding Pattern

After three consecutive rate cuts at its July, September and October meetings this year, the last FOMC minutes made it clear that most participants judge the current stance of monetary policy to be well-calibrated and that another cut would require the outlook to materially change. This means FOMC members want to see how things play out and are now very much data dependent.

High bar for a cut

Since its last meeting in October, the data has not changed significantly. While ISM manufacturing continues to remind the doves that risks remain, ISM non-manufacturing has stabilised, allowing for last month’s mild disappointment.

Friday’s strong jobs report also gives Powell plenty of cover to confirm the economy is in a good place, with equities riding near all-time highs and the yield curve having re-steepened, so indicating little chance of a recession.

Dot Plot more unified

It’s unlikely we will see any dissenters at this meeting as the two who previously objected to rate cuts won’t have reason to do so now. Expectations are for the target rate to remain unchanged in 2020 and the projections should show far less division than they did in September when three groups expected all three possible outcomes- a hike, cut and no change for the rest of 2019. Watch out for several hawks or the odd dove to possibly reappear here.

It will be interesting to see if Powell repeats his recent ‘glass more than half full’ comments around the outlook. Trade war tensions have softened somewhat since September and financial conditions have eased as well. Do participants soften their line on the downside risks to projections?

Dollar Liquidity

Markets will be monitoring any Fed hints about the pressures in short-term funding and any potential further policy actions. This is especially important with year-end looming which the Fed highlighted in its recent minutes as a time with a high risk of distress. The key issue here is that abundant liquidity doesn’t automatically mean a readiness to lend, especially as money-market pressures are beginning to resurface again.

Market Impact

Powell is likely to want to convey a ‘steady-as-she goes’ approach. There is around a 20% chance of another cut in the first half of next year, with just one full hike for the whole year. Continued data dependency means the jobs and service sector reports will warrant major attention going forward.

A patient stance could see USD rates move a touch higher with EUR/USD slipping. Losses should remain supported around the 100-day moving average at 1.1065 and firmly capped at 1.10. On the flip side, upside may be tough beyond 1.1116/20 but the dollar’s general undertone is looking soft short-term.