Word Games and the Federal Reserve
Ready to play word games with the Federal Reserve? As we have shared on numerous occasions, the Federal Reserve impacts interest rates not only by action but by words. In our opinion, recent statements show this remains true.
We expect the Federal Reserve to continue to move towards a path of easing rates. While economic activity appears strong, there is some evidence that unemployment is ticking up and economic activity is beginning to slow. A recent inflation number often cited by the Federal Reserve suggests that inflation has fallen from its lofty heights from of a year ago.
We are positioning portfolios on the assumption that rates are beginning to ease, and we see this as a positive sign for equity and fixed income markets. DWM portfolios are invested accordingly. We continue to monitor data to determine if we need to adjust strategically going forward.
Immediately after the Federal Reserve wraps up its meeting this week, all eyes are likely to gravitate to one small piece of wording that could unlock the future of monetary policy.
In its post-meeting statement, the central bank is expected give an important hint about interest rate moves to come by removing a clause from previous statements that reads: “In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time,” followed by an outlining of conditions it assesses.
For the past year-plus, the wording has underlined the Fed’s willingness to keep raising interest rates until it reaches its inflation goal. Remove that clause and it opens the door to potential rate cuts ahead; keep it and policymakers will be sending a signal that they’re not sure what’s to come.
The difference will mean a lot to financial markets.
Amending the wording could amount to a “meaningful overhaul” of the Federal Open Market Committee’s post-meeting statement, and its direction, according to Deutsche Bank economists.
“We heard at the December meeting that no official expected to raise rates further as a baseline outcome. And we’ve heard that Fed officials are beginning the discussions around rate cuts,” Matthew Luzzetti, Deutsche Bank’s chief U.S. economist, said in an interview. “So getting rid of that explicit tightening bias is kind of a precondition to more actively thinking about when they might cut rates, and to leaving the door open for a March rate cut.”