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Jerome Powell didn’t rock the boat during Powell the last FOMC meeting. As widely expected, policy makers raised the target band for the federal fund rate by 25bps to 2% - 2.25%, for the third time this year. It is worth noticing that the sentence “The stance of monetary policy remains accommodative” was removed from the statement, signalling that the Fed continues to move away from easy money. We bet it won’t make Trump happy. In addition, since October last year, the Fed balance sheet shrank more than 5.5%, or $235bn, down to $4.01tn, the lowest level since April 2014.
Nevertheless, the more interesting aspect of yesterday meeting was the update in median projection. The first thing we notice is that policy makers revised substantially higher real GDP growth for this year, up to 3.1% compared to forecast of 2.8% in June. However, in the longer-term the pace of growth should slow down to 2.5% in 2019 (2.4% previous estimate) and 2% in 2020 (unchanged). On the inflation side, the picture is roughly unchanged, while rate expectations were left unchanged and showed that the Fed should take a break in its hiking cycle starting in 2021.
Development in the FX market suggests that investors didn’t were to stand. Most currency pairs move violently following the meeting but most of them were unchanged at the end of the day. Investors are now already waiting for the next ECB meeting, which will take place on October 25, and the Fed December meeting. In the meantime, the trade war story, and Donald Trump’s random tweets will remain the main driver and create short-term volatility.
By Arnaud Masset
