- At the Federal Open Market Committee’s (FOMC) December meeting, participants judged that it would be “appropriate to maintain” the target range for the federal funds rate at 1.5% to 1.75% in order to support sustained economic expansion, strong labor market conditions, and inflation near the 2% target.
- The minutes from the meeting provided additional context to this decision, noting that downside risks appeared to have eased in recent months. FOMC participants noted that trade tensions with China were moderating, and the probability of a no-deal Brexit had declined. In addition, statistical models suggested that risks of a recession over the medium term had fallen noticeably, reflecting the normalization of the yield curve.
- Participants were also keen to point out that residential investment is picking up as lower mortgage rates feed through to the property market. They also noted that while the labor market remained strong, the “labor force participation rate could rise further still”, highlighting that there may still be some slack left in the labor market.
- However, business investment and exports continue to lag behind. A few participants worried that weak capital expenditures could lead to a slower pace of productivity growth in future years.
- The vote to keep the target range unchanged was unanimous. In addition to this decision, the Committee also directed the New York Desk to continue conducting repo operations “at least through January 2020 to ensure that the supply of reserves remain ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation”.
- Finally, this meeting was the last voting meeting of their current rotation for Fed governors Bullard, Evans, George, and Rosengren. Their committee positions will be replaced in 2020 by Kashkari, Mestre, Harker, and Kaplan.
Key Implications
- The December meeting minutes offered few surprises. The Committee judges that with recessionary and global downside risks receding, the “mid-cycle adjustment” they embarked upon earlier this year is at an end.
- The Fed will continue to closely monitor developments and will act if economic conditions deteriorate. However, in its base case, as in ours, the fed funds target range will remain unchanged in 2020.
