Fed Unsure on Policy for 2019 - 2020

Recent minutes from the Fed indicate that future policy should not to be assumed linear and that dovish or hawkish shifts are both still on the table.  

The Fed has taken an out of character U-turn cancelling planned interest rate hikes in response to a concern over the health of the global economy and growing risks within the domestic markets.

There is clearly no consensus between policy makers with some suggesting an ongoing easing of rates whilst others anticipating a tighter policy in the future. With no overwhelming vote it is more likely that rates are to be kept on hold for a couple of years whilst the nature of the global economy shows its true face entering recession or averting one. Fed participants were rightly looking at potential Brexit fallout, the ongoing slowdown in the EU and slowing domestic consumer spending to re-affirm the current dovish stance. History also tells us that the Fed has gone for aggressive cuts or modest ones followed by tight policy rather than a gradual decline in rates, so the play book is wide open and unpredictable.  

President Trump’s public thrashing of the Fed is not helping policy makers crack on with their job as they now must consider an overheated political response to any decision they make if it is contrary to the tune of Trump’s twitter page. President Trump claimed the Fed raised interest rates too much and too quickly in 2018, that these should be cut back and to even pump more cheap loans into the economy via bond buying.  

Markets responded as can be expected to uncertain news with equities and bonds both inching back on previous gains. As news broke the 10yr treasury yield was up 2 basis points and the S&P only just broke even up a measly 0.2%.