FOMC meeting: three things to watch out for

Interest Rates

Rates are expected to be lift unchanged at current levels, 2.5%, as the committee looks to judge the impact on the US economy and global markets. The Federal Reserve (Fed) policy took a dovish turn back in January with a speech by Fed chairman Jerome Powell, and the overall outlook has remained the same since then. Previously, markets had thought that there might be up to four rate increases this year, but now the median is two.

The lower expected path for core inflation means that the Fed is under much less pressure to maintain the pace of tightening, and as a result it seems highly likely that 2020 and 2021 will, for the moment, only point to policy being left unchanged, rather than a resumption of the Fed’s tightening policy.

Quantitative Tightening

The committee may even announce that its programme of reducing its balance sheet holdings, known as 'quantitative tightening (QT)', will be paused, giving the market time to absorb the tightening conducted thus far.

The Fed has reduced its balance sheet to $4 trillion from $4.5 trillion, but the continuation of this policy at the end of last year caused stock markets to drop dramatically. About 70% of US household assets are in financial markets, so any drop in stock markets will hit consumer confidence and retail sales. While the Fed does not have a mandate to prop up the stock market, it does have a requirement to maintain the US economy, and a drop in spending will hurt US economic growth.

Thus, we will see the Fed become very circumspect about continuing its QT programme, and it may even pause it for the time being.

Economic projections

Growth expectations will be key at this meeting, as investors face a world where US economic growth continues but Asian and European growth is slowing. This dichotomy is another problem for the Fed – the world economy is not their problem, but a slowdown will hurt the US too.

Trade wars are a chief problem, and the committee will not be able to get away without mentioning them to some extent. But the impact is still filtering through and with trade talks going on, there will be some hope of a resolution in due course.

US economic growth will likely slow in 2019, although not as badly as in other parts of the globe. Thus the Fed will look to be cautious and emphasise the policy tools at its disposal.

A softer outlook could see the dollar lose some ground, and caution about growth will not be an ideal scenario for equities, but a reminder about policy changes and possible loosening of policy might help the stock market.