2018 Was Busy Year, 2019 Promises Drama for Fed
2018 was a busy year for the Federal Reserve and those who follow it, with four rate hikes, personnel changes, yield curve inversion and discussion of the neutral rate. Also, in November, the Fed announced it will review monetary policy strategies, tools, and communication practices in 2019.
That discussion will culminate with a research session in Chicago in June.
The Federal Open Market Committee projects two rate hikes next year, but as Federal Reserve Bank of New York President John Williams said, it’s guidance “not a commitment, or a promise.” Meanwhile, markets are not expecting even two rate hikes.
Also, Fed Chair Jerome Powell will host a press conference after every Fed meeting next year. “This will enable a more flexible monetary policy environment,” said Doug Duncan, chief economist at Fannie Mae.
“Chairman Powell is being very predictable and speaking very clearly as we expected,” Duncan added. “We warned at the beginning of the year that there would be no ‘Powell put’ if, as expected, the stock market started to decline amid a tightening in monetary policy. We expect no change on that front unless there is a threat to the stability of financial markets and institutions.”
Balance sheet reduction will continue on autopilot. In October, the maximum monthly runoff increased to $30 billion Treasuries and $20 billion mortgage-backed securities.
“And the effect is cumulative,” noted Bryce Doty, senior VP/ senior portfolio manager at Sit Fixed Income. “So while balance sheet reduction seems like old news, each month has a greater and greater impact due to the permanent nature of the elimination of cash from the financial system.”