Will COVID-19 Force the Fed's Hand?
|The Federal Open Market Committee (FOMC), which cut rates 75 bps in 2019, has kept its target range for the fed funds rate unchanged at 1.50% to 1.75% since October (Figure 1). Moreover, the so-called “dot plot” suggests that most committee members believe that it would be appropriate to keep the target range unchanged throughout 2020 (Figure 2). However, the rapid spread in recent days of COVID-19 to countries other than China has led market participants to the conclusion that the FOMC will be forced to ease policy. As of this writing, the market is fully priced for a 25 bps rate cut by the June 10 FOMC meeting and another 25 bps rate cut by the November 5 meeting. Will the Fed cut rates?
The mantra coming out of the Fed in recent months has been that the current stance of monetary policy will remain appropriate as long as there is not a “material” change to the economic outlook. In that regard, the “central tendency” of FOMC members’ forecasts sees U.S. real GDP growing roughly 2% between Q4-2019 and Q4-2020 (Figure 3).1 In terms of PCE inflation, the FOMC’s preferred measure of consumer price inflation, the central tendency for 2020 is just below 2%. So what would constitute a “material” change to the Fed’s economic outlook?
The FOMC does not make its forecasts of quarterly GDP growth publicly available. But our GDP growth forecast for 2020 is roughly similar to the FOMC’s projection as we look for real GDP to grow 2.1% on a Q4-to-Q4 basis in 2020.2 Consequently, the FOMC’s quarterly growth forecasts for 2020 are probably roughly similar to our own. We currently look for real GDP to grow at an annualized rate of only 1.5% in the first quarter of 2020 before rebounding to growth rates of 2.3% and 2.4% in the following three quarters. Thus, the FOMC would likely need to see evidence that the economy was growing “materially” slower than these growth rates to induce it to cut rates.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.