FOMC: Strong signal of a low-for-longer outlook – Deutsche Bank

Analysts at Deutsche Bank note that turning to the Fed last night, the main headline was that the FOMC unanimously voted to leave rates unchanged, in line with the market’s expectations following a run of 3 successive 25bp cuts.

“This was actually the first unanimous decision since May. Looking at the statement, the language on the economy was unchanged, with the Fed continuing to say that “the labor market remains strong and that economic activity has been rising at a moderate rate.” In a slightly hawkish lean, however, they also removed their comment from the previous meeting’s statement that “uncertainties about this outlook remain.

Examining the dot plot, the median dot for next year saw policy remaining unchanged, with just 4 members wanting a 25bp increase, while the median dot for 2021 saw a 25bp hike. That said, there was some variation around this, with 5 members seeing no change in policy, 4 with a 25bp increase, 5 with a 50bp increase, and 3 with a 75bp increase from present levels. But notably, not a single FOMC member opted for a cut, signaling that the Fed has finished its period of insurance cuts.

In his press conference, however, Chair Powell pushed back against any inferences that this meant the Fed now had a tightening bias, saying that “a significant move-up in inflation” was needed in order to support rate hikes.

The most important conclusion from it was Chair Powell's strong signal of a low-for-longer outlook for the policy rate with rate hikes very unlikely for the foreseeable future. In contrast to the signal from a year ago when normalization was the driving force for the policy outlook, Powell stressed below-target inflation creates challenges, slack remained in the labor market despite a fifty-year low in unemployment, and a "persistent" and "significant" rise in inflation was needed to justify higher policy rates. These signals reinforce our team’s view the Committee is cognizant of the benefits of a hot labor market and is therefore likely to adopt an inflation makeup strategy as a result of the policy review. As Powell made clear, this change will require a credible commitment to be successful.”