This afternoon the Federal Reserve’s FOMC delivered an “unchanged” decision regarding its key short-term policy rate and released a drafted committee statement that was mostly reflective of December’s release and supportive of the Fed’s outlook for a persistent pause on monetary policy rates. While this was all in-line with what we—like most of the market—anticipated today, there was a little more of a dovish tone to the proceedings than expected.
— Yahoo Finance (@YahooFinance) January 29, 2020
The FOMC’s Decision & Statement
Today’s policy decision was about as milquetoast as they come: there’s not change to the key short-term interest rates, while the FOMC will continue their operations supporting repo market liquidity through April. A key theme that was repeated in the FedSpeak of recent weeks and carried through today’s statement and Q&A is that the FOMC-- while taking into account the still-relevant downside risks of trade instability and the economic impact of the Chinese coronavirus that pummeled markets earlier this week-- believes its current monetary policy stance is “well positioned” to support continued growth in the American economy.
While the tone coming from Jerome Powell & Co. today was consistent in signaling comfort with the current policy path, small changes to the committee’s joint statement cast a slightly dovish shade on the outlook. Most notably, the language around inflation was downgraded, removing the description of prices as rising at a rate “near the committee’s symmetric 2% objective.” Given that Chairman Powell has set a high bar for a marked and persistent acceleration in inflation before the Fed would consider hiking rates again, this change suggests that in the Fed’s outlook we are well away from reaching that point, and so rates should remain low.
I was surprised to also see that the statement downgraded the Fed’s description of the rate of increase in household spending from “strong” to “moderate.” As we’ve touched on recently, the Fed is clearly reliant on a healthy American consumer to help carry the US economy through some rough spots at this stage in the expansion; like the description of policy in relation to inflation, this tweak to the statement suggests that the Fed sees the economy as healthy, but still quite far from running with the heat that will require a tightening of monetary policy. Both of these changes will probably increase the attention paid to Friday’s economic data, which will include updates of the Fed’s preferred metric for consumer inflation as well as new Personal Spending data.
Chairman Powell’s Press Conference
In his regular post-meeting press conference, Jerome Powell essentially followed through on the themes of the statement. He acknowledged that the committee is indeed uncomfortable with how far “below target” inflation has run recently, while also pointing out that while the “phase one” trade agreement between the US and China is some kind of step in a calmer direction, the risk of problematic friction around global trade remains:
"It hasn't gone away," Chair Powell says of trade uncertainty.
While recent developments are positive, "there's a bit of a wait-and-see attitude, is this going to be sustained?"
— Jeanna Smialek (@jeannasmialek) January 29, 2020
The Chairman also took time to acknowledge the likely (as well as potential) impact that the coronavirus and efforts to halt its spread will have on global growth via damage to the Chinese economy. Powell assured markets that the Fed will be closely monitoring the situation, but also did well to caution against unwarranted market panic.
Gold had been trading through Wednesday’s session relatively flat to $1570/oz pre-FOMC, and markets were appropriately muted around the initial announcement and release of the committee statement this afternoon, although gold prices made some small gains as markets digested the dovish adjustments to the statement. The real moves in pricing came along with the Chairman’s press conference, at which point the yellow metal made considerable moves higher to reach today’s closing spot price of $1577.
The directional move in gold prices certainly made sense. At once we were receiving further confirmation of lower yields for longer, and signals that the Fed perceives greater downside risk to the economy than we thought; both inputs are fundamentally supportive of gold buying. Still, a nearly $10/oz gain overall seemed a little steep on sentiment alone. Indeed, it was selling in US stocks—both the S&P and the Dow curiously gave back their gains for the day while Powell was speaking-- that enhanced the yellow metal’s rally. Maybe it’s a little bit of risk aversion around the concerns that Powell & Co. expressed around inflation and trade outlook, but the committee’s decision to keep greasing the wheels with its repo market operations alone, to say nothing of the strong signal that monetary policy will remain “eased” at least through the end of 2020, should be viewed as broadly positive for equities and other risk assets.
I suspect that both this afternoon’s drops in stock prices and Treasury yields, and gold’s upside swing were a little over-extended; in that case, we should see some correction during the overnight sessions that may bring gold prices back down a bit. Today’s developments may also increase the sensitivity of the yellow metal and the green Dollar to this Friday’s PCE Price Index and Personal Spending data, so stay tuned for that.