There were no surprises as the Federal Open Market Committee (FOMC) voted to maintain its target rate range at 2.25%-2.5% in its third official meeting of 2019. The vote was unanimous. While the last meeting saw the dot plot move in a decidedly dovish direction, the current release and press conference did not represent to us any obvious directional shift. The latest real GDP print of 3.2% for the first quarter of 2019 supports the case that the economy is doing fine, although the release did highlight slowing household spending and business fixed investment, supporting the case that the economic picture remains mixed. Combine this with manageable inflation levels, the PCE Price Index was up only 1.5% for March, and there doesn’t seem to be much to force the Fed’s hand anytime soon.
Given the current pause, the key debate going forward is over what will cause the next series of hikes or declines, and when? In the current release and the later press conference, not many clues were given. Federal Reserve Chair Jerome Powell simply affirmed that the FOMC is comfortable with its current policy and does not see a strong case for a move in either direction at the moment.
If we see a more drastic slowdown in growth and/or changes in unemployment for the worse, this could likely be the driving force behind rate declines. With no inflation pressure, it does not seem the Fed is worried about “not taking away the punch bowl too soon.” In response to questions about inflation potentially being too low, Powell stated that the FOMC believes the current lows are transient, while pointing out that the trimmed mean Personal Consumption Expenditures index (PCE) – the Fed’s preferred inflation measure – was coming in at roughly 2%. While the Fed has affirmed that it is committed to its 2% inflation goal, there does seem to be room for manoeuvre, depending which inflation metric and/or time period is used. Therefore, we don’t imagine inflation being the main driver of rate hikes or decreases over the medium term, but rather economic growth and employment.
The current meeting did not feature a new dot plot release or new economic projections. The language of the release remained essentially unchanged. The release did highlight that inflation measures have declined to below the 2% mark whereas before it was stated that inflation was near the 2% mark, but otherwise the language was essentially the same. Also, as expected, the Fed officially instituted the new cap on monthly treasury redemptions, changing it to $15 billion from $30 billion.
We have maintained our underlying rate hike assumptions for our US banking coverage, which includes no rate hikes in 2019, and a single hike in mid-2020. While it is debatable that another rate hike will occur in 2020, having one or no more rate hikes is not a significant driver of fair values among our banking coverage. CME futures data has shifted a bit since the last meeting, which occurred in March. The futures data now points to a rate cut as the most likely outcome sometime toward the end of 2019, either in October or December. This is a bit more bearish than before.
