Although US growth remains strong, global headwinds, softer survey data and tighter financial conditions have put the FOMC in risk management mode. Policy remains data dependent, but a patient stance will be adopted before deciding on the next move in monetary policy. Inflation, which remains well under control, facilitates this wait-and-see attitude. Markets are now pricing in a policy easing in the course of 2020. More than anything else, this shows to which extent uncertainty has taken its toll on confidence.
“Uncertainty is not the friend of business”. This quote from Jerome Powell in his post-FOMC meeting press conference this week neatly summarises what is at the heart of the global slowdown which started in 2018 and is finally impacting the US as well.
Uncertainty is multi-faceted. Last December Mario Draghi called it “increased general uncertainty, which takes the shape now and then of different phenomena”. Watching the ECB president last week and the Fed chairman this week, there are a lot of commonalities in their analyses. This is not surprising: the Chinese slowdown, the trade negotiations, Brexit worries, the US government shutdown are globally relevant. Powell spoke about a US economy which remains strong, despite the weakening of some survey data, but which is increasingly faced with the “cross-currents” mentioned before. This puts the Fed in risk management mode which dictates a patient approach. Waiting for more data before deciding on the next policy move (note that the direction is not mentioned) is all the easier because “the case for raising rates has weakened”. Inflation risks have declined and risks from financial imbalances (i.e. bubbles) have receded. Even more so, financial conditions, which the Fed assesses on the basis of a large number of market data such as volatilities and spreads, had tightened significantly in December and despite some easing, have remained rather restrictive.
Financial conditions are important in Fed thinking. After all, as mentioned by Powell, monetary policy works through changes in financial conditions in order to influence growth and inflation. This also means that tighter conditions influence the growth outlook and hence the assessment of what is an appropriate monetary policy stance.
Quite understandably, the FOMC’s conclusion has been that the combination of cross-currents, less supportive financial conditions, softer survey data and inflation which remains fully under control warrant to be patient. This is all the more appropriate considering the symmetric inflation objective and the limited policy leeway to address a major slowdown or recession.
