FOMC in 2019: Dovish tilt

Ever since the interest-rate turnaround in December 2015, market participants have been asking themselves at the outset of every new year how often the Fed will be likely to tighten the monetary reins in the twelve months ahead. Last year, market actors underestimated the Federal Reserve’s rate-hike momentum, banking on two tightening steps whereas the Fed in the end implemented four. This may well have been due to the fact that the hawkish camp had the upper hand in the Fed’s chief monetary policymaking body during 2018.

Towards the end of the year, the Fed adopted a more free-handed approach to inflation fighting, while concerns about the economic trend grew more pronounced. The upshot of this shift in the dominant monetary-policy consensus prevailing during the past year was that FOMC members pencilled in an average of only two further key-rate hikes for 2019, rather than the previous figure of three, in their December projections. The identity of this year’s regional Fed presidents serving one-year terms on a rotating basis could underscore the Fed’s currently cautious stance. The balance of power will presumably tilt slightly more towards the dovish camp at this year’s first FOMC meeting.

Of course, the economic environment also plays an important role in determining the monetary-policy alignment. In our opinion, the current employment situation and the favourable economic climate add up to a pleasing outlook for the year ahead. However, the fact that inflation remains on a merely moderate path can be adduced as an argument against a further tightening of the monetary reins.

On the financial market, concerns about a possible decline in cyclical momentum currently prevail. There are numerous reasons for this. On account of such concerns, market participants are currently not merely assuming that US monetary policy will remain unchanged in the coming months – they are actually already anticipating key-rate cuts towards the end of the year. The Fed governors themselves see, on average, two further key-rate hikes coming through in the present year. We too consider the market’s current pessimism to be overblown. It is our view that the Fed will move to raise the fed funds rate twice more during the first half of the year.

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