Fed: Key rates remain (for the moment) on hold

At the latest meeting of the Fed’s Federal Open Market Committee (FOMC), the target range for the fed funds rate was, as generally expected, left unchanged. The Fed had already expressed a good deal of optimism about the economic growth path in the previous FOMC Statement, and the tenor of the new statement from Dr. Powell and his team remains positive. For example, they have reaffirmed that momentum in the domestic economy is very strong. The unemployment rate is now said to no longer be “low” but to be “declining.“ Only business investment is perceived to have “moderated” from its rapid pace earlier in the year. It has also been pointed out that longer-term inflation expectations are unchanged. Overall, FOMC members have gone on record as saying that economic risks appear “roughly balanced,” adding that further gradual key-rate increases are warranted against this background. It is therefore extremely likely that a further tightening step will be implemented in December.  After all, there is reason to be concerned that vigorous economic growth, higher tariff duties and mounting wages will lead to greater inflationary pressure. As has invariably been the case in recent months, the FOMC monetary policy action was endorsed unanimously by committee members.

Most market participants had been anticipating ahead of the meeting of the Federal Reserve’s top policymaking body that key rates would be kept on hold and that the tenor of the new FOMC statement would be more or less unaltered. Against this backdrop, reactions on financial markets were subdued. The market-implied probability of the fed funds rate being raised again in December is more or less unchanged at slightly below 74.4%. Regarding rate-hike expectations, the implied fed funds futures curve only starts deviating from the Fed’s own projections in the coming year: where the US monetary watchdogs are currently pencilling in a total of three tightening steps for 2019, financial-market actors are only looking for the monetary reins to be tightened on two further occasions.

At 3.5%, US GDP growth proved to be decidedly robust in the third quarter. The exuberant mood among US consumers and the historically favourable employment situation suggest that the pace of macroeconomic growth is going to remain elevated in the coming quarters. At the same time, the federal measures to stimulate US economic activity which came into force at the beginning of the year are continuing to bear fruit.  Even though the positive effects of the government’s fiscal-stimulus measures are probably going to slowly fade, we think that the strength of domestic economic activity will prevent the overall economy from slowing noticeably. In this environment, the Fed will probably continue to progress along its rate-hike path in the coming year.

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