Fed Hint of More Dovish Stance Enough for Investors

The Federal Open Market Committee concluded its two-day meeting on Wednesday afternoon with the announcement that there would be no change to the target rate at the present time. That was what pretty much what everyone expected—no rate change in January. The stock market reacted in a positive manner despite the Fed doing what was expected, but it was more about the statements that came along with the announcement that caused investors to be enthusiastic.

The Fed also indicated that it would be more flexible with the rate policy going forward and that it would be a while before the next move was determined. The official statement included the following passage, saying the committee “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”

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In addition to the temporary halt in rate hikes, the FOMC indicated that it would slow down on the balance sheet “normalization” process. In layman’s terms, this means that the FOMC will slow down on the selling of treasuries it has on its balance sheet. The Fed has been selling Treasuries in recent years in order to reduce the massive holdings it had built up.

When the Fed is selling treasuries on the open market, it has the same effect of raising rates. Increased selling leads to bond prices falling, and when bond prices fall, the yield of those bonds increase.

While the majority of investors greeted the news with enthusiasm, I for one view the developments as a neutral event. The Fed has been raising rates for the last few years because the economy was growing at a pace that could absorb higher rates and not come to a screeching halt. And that is exactly what we have seen—the economy kept growing at a nice pace and the rate hikes didn’t slow it down.

Now the Fed is halting the rate hikes because of concerns about the domestic and global economies. The concerns are the same ones I have been addressing in the past year—the trade war with China, slowing economic growth in Europe and China, the impact of the government shutdown, Brexit…

While I do agree with the Fed that they needed to slow down, I don’t agree with the change in policy being a bullish event as many investors apparently see it. I think it means the Fed needs to wait and see what happens over the next four to six months and then proceed from there.

I have read and heard comments from some analysts and economists saying that the Fed will make a rate cut in 2019. Personally, I hope that isn’t the case, because if they do it will mean the economy is having problems and that would hurt the market more than another 0.25% rate hike. In the press conference after yesterday’s meeting, Fed Chairman Powell said that the committee would rely on the data to determine what the next move is. If the next move is a cut to the Fed Funds rate, it will signal that the economic data is weakening and that a recession is possible.

If the next move is another hike, it will signify that the economy has gotten past the various concerns and is still growing at a modest pace.

I was interviewed in a podcast for Seeking Alpha yesterday and was asked about the Fed and what I saw happening with rates in 2019. The podcast was before the Fed announcement and press conference. My response was that I see the Fed making one more rate hike in 2019, but that was it. I also added that I was hoping this was the case because it would signal that the economy was still going strong.

It is a fine line the Fed has to walk, and the current economic and political environment, both domestically and globally, are not making their job any easier. Taking a break from the hiking cycle was the right thing to do and now it is a matter of reading the various economic reports over the next few quarters to determine the best path. I reiterate that I hope the next move is another hike because it will be a sign that the economy is doing well.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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