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Powell as a Wallflower

RFP
The Federal Open Market Committee (FOMC) meets on January 29-30 to be followed by Chairman Jay Powell’s first press conference of the year. Last year the Fed decided that starting in 2019 the Chairman would host a press conference after every meeting to underscore that every meeting was “live” - or primed - for a potential decision on interest rates or the trajectory of its balance sheet.

This week, it would serve the Fed well to fade into the background following the meeting as it grapples with some challenges.

To begin with, the Federal Reserve is in the uncomfortable position of making policy decisions amid a statiscal void, given the the just-ended government shutdown has delayed the release of key economic data. That is something they abhor, especially in the face of a possible consequential slowdown. Chairman Powell had already repeatedly stressed that the Fed plans to be “patient” with rate hikes in 2019, after raising them four times last year. He has also emphasized the Fed’s willingness to slow or end reductions to its bloated balance sheet.

The statement following the meeting will likely highlight the little bit of good news we have seen in the data released since the onset of the shutdown, which includes a much better-than-expected surge in December employment. But it will remove references to additional rate hikes as the focus shifts to moderating inflation with less urgency on interest rates.

It will also point out complications created by the government shutdown and why those factors have historically not shown up as a permanent drag on growth. Risks to the outlook, which were already downgraded at the December meeting, will remain balanced. There are more concerns about the global outlook for growth since the Fed last met, but in the absence of data and the disruptions created by the government shutdown, the central bank doesn’t have enough information to make a fundamental change to its forecast.

The Fed has had many discussions about how its balance sheet reductions are not turning out as anticipated, with more complications emerging with regard to its ability to control short rather than long term rates. That said, they don’t appear quite ready to signal a change to the balance sheet. Moreover, the focus of any changes in the Fed’s balance sheet reductions will be on its Treasury holdings. Those hoping the Fed will do a sudden turnaround in its reduction of mortgage-back securities are likely to be disappointed.

There is a also substantial risk that any “new” news by the Fed could be misinterpreted. What is now accurately perceived as the Fed’s patience and flexibility on the economy could be interpreted as panic if the Fed takes action that is perceived as accommodative, especially in the absence of new data. Traders and the public could react badly to the erroneous assumption that the Fed knew something dire about the slowdown in growth, triggering a more dramatic slowdown. Hence, the Fed and Chairman Powell’s aim should be as nondescript as possible.

Bottom Line
The FOMC and Chairman Powell would serve themselves well to say less rather than more after their first meeting of the year. After botching the message following the December meeting, Powell has proven himself to be a quick learner.

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