Instant Analysis: FOMC statement for January
A lot of dovish hints in the January FOMC statement today, but nothing concrete. Hence the negative reaction from the stock market today.
I think the Fed is on hold right now and hasn’t made up its mind yet if the global market volatility and economic developments in China will herald a dramatic shift in the U.S. economic or inflation outlook.
A March rate hike from the Fed appears to be a stretch (we never had one in our baseline forecasts), but a second quarter rate hike is still possible, if U.S. economic growth and stocks bounce back convincingly in Q1. We hold to our baseline forecast of three quarter-point rate hikes this year, but the probability of just two quarter-point hikes or less this year is on the rise.
The FOMC statement acknowledged that U.S. economic growth slowed late last year, net exports have been soft, and inventory investment has slowed.
The FOMC appears to be further away on their inflation mandate. Market inflation expectations have declined further, and inflation will remain low near-term, according to the January statement.
A key phrase in the statement:
“The committee is closely monitoring global economic and financial developments and assessing their implications for labor markets and inflation, and the balance of risks to the outlook.”
The fact that they included the “balance of risks” wording above opens the door for a change in the balance of risks to the downside, and even an interest rate hike reversal at some point, should the economic and financial outlook turn out to be particularly nasty down the road.
The FOMC just took out a U.S. recession insurance policy, just in case.