Weekly Market Review: The Fed signals a major change in approach at its January meeting
The biggest American football game of the year was played last night, and for the first three quarters, it looked as if both teams forgot how to score a touchdown. But great teams find a way to win, even when their tried-and-true game plan seems to be faltering.
The Federal Reserve (Fed) has been in a similar place, sticking to its playbook of rising rates and balance sheet normalization, and causing market jitters in the process. But last week, we saw the strongest indications yet that the game plan may be changing. The Fed released its January statement and held a press conference last Thursday. The Fed made it clear that "the case for raising rates has weakened," citing a variety of factors from a slowing global economy to policy uncertainty surrounding trade conflicts and Brexit, and relatively low inflation.
The Fed's January statement said it would be "patient" as it "determines what future adjustments to the target range for the federal funds rate may be appropriate." This promise of "patience" was a welcome change from what felt like a brisk series of systematic quarterly rate hikes in 2018. Powell made a dramatic about face when he said last week that the Federal Open Market Committee (OTCPK:FOMC) might already be at neutral: "Our policy stance is appropriate right now. We also know that our policy rate is in the range of the [FOMC's] estimates of neutral." This was a significant change from Powell's comments in October when he said the Fed was a long way from neutral (which of course helped catalyze the fourth-quarter sell-off). Now, this doesn't mean the Fed won't raise rates this year, but it certainly means the Fed will be far more unhurried, measured and thoughtful about any more rate hikes.
But the big news from last week was about the Fed's balance sheet. As recently as December, Powell had insisted that the balance sheet normalization process would remain on "autopilot," stoking market concerns. However, since then, FOMC participants including Powell have suggested the Fed could be more flexible. And then came the January FOMC meeting, when the Fed signaled a major change in its approach to the balance sheet. While the FOMC was clear that the balance sheet will not be the "active tool" of monetary policy operations, it assured that the balance sheet could be altered depending on conditions: "The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments," according to the FOMC's statement.
From my perspective, that was a very important change - being essentially data dependent (rather than operating on autopilot) is a good thing. And I believe this change in perspective will help to support risk assets going forward, regardless of whether or not the Fed actually alters its normalization plan.
The FOMC decision and press conference seemed strange given how significant a departure it was from the Fed's decision just six weeks ago. It seems even more bizarre when it is juxtaposed with the US jobs report released two days later. The US employment situation report for January was another blockbuster, with nonfarm payroll growth of more than 300,000 and average hourly earnings growth above 3% year-over-year.1 (Now, the caveat is that the previous month's nonfarm payrolls had to be revised down significantly, but this was still a strong report.)
But despite the strong US jobs report, we have been seeing signs of a global slowdown - which helps explain the Fed's decision (it even cited a slowing global economy as a reason for its newfound patience).
Below, I highlight seven issues to watch in the coming week:
Finally, I would like to wish everyone a happy Chinese New Year. I look forward to seeing what the Year of the Pig has in store.
1 Source: US Bureau of Labor Statistics, as of Feb. 1, 2019
2 Source: Eurostat, as of Jan. 31, 2019
3 Source: Reuters, as of Feb. 1, 2019
4 On Jan. 28, US authorities issued indictments against Chinese tech firm Huawei. Allegations include violating US sanctions on Iran as well as attempted theft of trade secrets.
5 Source: The Guardian, "Nissan warns of Brexit concerns as U-turn at Sunderland confirmed," Feb. 3, 2019
Blog header image: Billion Photos/Shutterstock.com
The Federal Open Market Committee (OTCPK:FOMC) is a 12-member committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.
The federal funds rate is the rate at which banks lend balances to each other overnight.
The Caixin/Markit Purchasing Managers' Index (PMI) for China is considered an indicator of economic health for the Chinese manufacturing sector. It is based on survey responses from senior purchasing executives.
The Sentix Investor Confidence Index measures the economic outlook for the eurozone, based on a survey of investors and analysts.
The Japan Leading Economic Indicators Index measures 12 leading indicators for the Japanese economy.
In a "no-deal" or "crash out" Brexit, the UK would leave the EU in March 2019 with no formal agreement outlining the terms of their relationship.
Gross domestic product is a broad indicator of a region's economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.
The opinions referenced above are those of Kristina Hooper as of Feb. 4, 2019. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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