2018 Was Busy Year, 2019 Prom­ises Drama for Fed

The Bond Buyer - - Market News - — Gary E. Siegel

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.”

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