But First I want to say the probability for a June rate cut is 55% one week ago it stood at 18%. The Bold highlights below are What I find most important
- The FOMC held interest rates steady at its January meeting and, as expected, made only very small changes to the policy statement. The message from the FOMC was clear—despite some lingering and some newly emerging downside risks, the economic outlook remains in a good place and the stance of monetary policy remains appropriate.
- Changes to the FOMC’s policy statement were few. In fact, this was one of the least changed Fed policy statements in quite some time. Nevertheless, the Committee made an important though subtle change to its characterization of the inflation outlook that acted to emphasize its commitment to getting inflation better centered around the symmetric 2% goal.
- Despite changes to IOER and an extension of repo operations, Chair Powell made clear that he does not view the Fed’s bill purchases as a form of QE. The Chair also pushed back on the view that these purchases were having an impact on risk markets.
- Looking forward, we continue to expect no change in monetary policy throughout 2020, with the fed funds rate remaining in a range of 1.50-1.75%. Equally as important, we view the Fed’s shift in inflation language as another move in the direction toward our view that the Fed will adopt a loose average inflation targeting framework at the conclusion of its policy framework review around the middle of this year.
US Rates & FX Strategy
- We continue to suggest owning UST 2y and 5y notes. The Fed’s strong re-emphasis on 2% on inflation, alongside their acknowledgement of downside risks from the Coronavirus, and trade policy uncertainty, will keep the market pricing a dovish Fed. This should ultimately support front-end Treasury yields.
- In TIPS, the outperformance of real yields to breakevens once again highlighted that the market places more weight on the Fed’s willingness to generate 2% inflation than its ability to do so. We stay neutral on TIPS real yields and breakevens.
- Consistent with our base case, the Fed extended repo operations through April and ensured that T-bill purchases will persist into 2Q. We expect the Fed to begin tapering the size of repo operations and believe that as reserves (sans repo) comfortably grow beyond $1.5tn, the Fed will reduce monthly T-bill purchases in an attempt to taper purchases over time.