At January's FOMC meeting, the Fed delivered a message to soothe markets and keep the economy at a simmer.

Jim Palmer, Chief Investment Officer

The market spoke and the Federal Reserve (Fed) responded. Recent financial market volatility and tightening of financial conditions had investors howling the Fed was out of touch. Well, the Fed and its clearly humbled Chairman responded with a tone designed to please the most cynical of doves.

Key points from the Fed's statement and Chairman Jay Powell's press conference included:

• The federal funds target range remained unchanged at 2.25% to 2.50%
• The Interest on Excess Reserves remained unchanged at 2.40%
• The Fed committed to being "patient" with future rate adjustments
• The Fed emphasized adjustments to administrative rates as its primary monetary policy tool
• Balance sheet run-off remained capped at $50 billion per month
• The Fed stated it is prepared to alter the size and composition of its balance sheet if future economic conditions warrant a more accommodative policy - reversing the autopilot concept
• The Fed's economic outlook remained essentially unchanged and Chairman Powell stated the economy is in a "good place" and will grow at a solid but slower pace than seen in 2018
• The Fed feels the risk of elevated inflation has diminished

The Fed basically ticked every box on investors' list of demands. Use the word "patient" - check. Lose the term "further gradual increases" - check. Reflect flexibility with the balance sheet - check. Not a bad day for the doves. But you know, it just feels like the statement and press conference were designed to give the Fed some breathing room and get the markets off its back.

In our opinion, Fed officials - Chairman Powell in particular - likely believe monetary policy rates are still slightly below neutral and are biased to continue tightening. Chairman Powell's previous hawkish comments about rates being "a long way" from neutral and how balance sheet downsizing should be on "autopilot" were unfortunate and unnecessary verbal gaffes, but likely reflected the Chairman's true opinions. Within this context - not to mention the December Dot Plot's call for two 2019 rate hikes - it seems likely the Fed would prefer to lift rates when market conditions permit. Those conditions would include an extended period of relative financial market stability, a resolution to federal government budget and debt ceiling issues and a steeper yield curve, as the Fed is - or at least should be - reluctant to invert the yield curve via a policy move. We believe such an environment will be met over time, which has us still calling for a mid-2019 rate hike.

Sources

Federal Reserve Press Release, Federal Reserve Issues FOMC Statement, January 30, 2019

Federal Reserve, Implementation Note Issues January 30, 2019

Federal Reserve, Transcript of Chairman Powell's Press Conference Opening Remarks, January 30, 2019

FOMC Projection Materials, December 19, 2018

Bloomberg, "Powell Says Fed May Lift Rates to Levels That Restrain Growth", October 3, 2018