Jim Barnes, Senior Vice President and Director of Fixed Income at BMT Wealth Management, discusses the Federal Open Market Committee (FOMC) meeting that concluded on January 29th, the first meeting of the year. As expected, the Federal Reserve (Fed) left the federal funds target range unchanged at 1.50% – 1.75%. Overall, the Fed continues to have a favorable view of the U.S. economic outlook although uncertainty remains regarding trade and global growth. In the post FOMC press conference, the Fed Chairman responded to a number of questions regarding its growing balance sheet but stopped well short of describing it as Quantitative Easing.
Introduction: Welcome to the Bryn Mawr Trust Wealth Management podcast, providing commentary on what’s moving the financial markets, financial planning and other timely business and monetary topics. Please welcome today’s host, Jim Barnes, director of fixed income at BMT Wealth Management.
Jim Barnes: Great to be back with you once again to talk to you about the FOMC meeting that transpired earlier today. It was the first meeting of a of 2020 and I thought now it’d be a great time just to do what a quick recap of what had transpired in 2019 just to sort of set the stage of what had transpired earlier today in 2019 we know that we started the year with the federal funds target range up but with an upper bound of about two and a half percent or so and we know that the federal reserve, I had been looking to continue to raise interest rates as they were very concerned with the strong labor market, the healthy labor market and its potential impact of pushing wages higher and what that could do to just consumer prices in general. And the fed was very adamant about having to get ahead of that gradually raise interest rates now because that would help alleviate the chances of them having to raise them quite a bit later on.
Jim Barnes: So basically just trying to get ahead of the game. But as we know now as 2019 progressed, the federal reserve thought to themselves, you know what, this inflationary problem, this expected inflation, it’s just not, it’s not happening. And so we’re not going to be too concerned about that at this point. We still think that the, the overall fundamentals of the U S economy looked pretty good, but we’re getting a little more concerned with some of these trade tensions that are out there that continue to brew as well as the global economic growth. That was a, where economic data continue to weaken somewhat. So the fed shifted a little bit and they kind of took raising interest rates off the table and they wanted to wait and see how some of these other factors were going to influence the U S economy. So as the year progressed, they didn’t do much with interest rates at all.
Jim Barnes: They kept it at two and a half percent. But then as the year went on, they thought to themselves, you know what, we got to keep this economic expansion going. We have the longest economic expansion in U.S. History. It’s right now on, on its 11th year. And they want to keep this expansion going just simply because it’s, it’s reaching out to so many more individuals here within the U S and they liked that. They liked the fact that more people are starting to prosper from the current economy. And so what they did is they started throwing out this term in the back half of 2019 they started talking about insurance cuts and they cut that federal funds target range, not once, not twice, but three times in 2019 for a total of 75 basis points. We ended the year with a target range from one and a half to 1.75% so here we are in in 2020 and now we’re trying to get a feel for whether or not, well, is that enough?
Jim Barnes: Is the fed going to be happy with the amount of policy that’s right now in the marketplace? Is that going to be enough to kind of keep this expansion going? Here are some of the factors that had led to a weak global economic growth. Have those factors somewhat subsided so that global growth will start picking up? And then of course the other risks or last words. So they talked substantially last year on the trade front. What does that look like? So today’s meeting real quick, they didn’t do anything. They left rates unchanged and I was, that was highly, highly anticipated. They talked about the things that have happened on a trade front and they said some of the recent developments, most notably that phase one agreement that China and the U S had signed early on in January. That was a positive in terms of lifting some of the uncertainty that was hanging on the marketplace.
Jim Barnes: They talked about the global economy and how very possibly said that the manufacturing sector looks as if maybe it has a bottomed out and maybe has even a turn to the upside. So those are some positive things that will lead you to think that maybe fed policy right now is in a good spot because as we know, fed policy, monetary policy operates on a lag and those rate cuts that took place in the back half of 2019, they’re still working their way through the system and not just here in the U.S. But I think there is going to be some impact to outside the U S as well. Now we do know that over the past couple of weeks there has been the Corona virus that has impacted most notably China, but has started to leak outside that area as well. And chairman Powell, he did acknowledge that in his FOMC press conference and he simply stated that it’s a serious situation.
Jim Barnes: It’s an area of concern. It’s too early though to really gauge what the economic impacts going to be and he simply stated that it’s something that the federal reserve is closely monitoring, but at this point it’s very difficult to determine what the overall end results going to be. So that is something that they’re taking a look at. He answered a number of questions today on the size of the Fed’s balance sheet and those liquidity injections. There’s been a lot of articles and questions about those U.S. Treasury board purchases that have taken place over the last four months. Whether or not that is quantitative, is it quantitative easing, is it not quantitative easing? You know, you’re, you’re right now the federal reserve is actively increasing the size of the balance sheet and historically we’ve just been, we’ve grown accustomed to the fact when the Fed’s growing their balance sheet, that’s quantitative easing. They are buying us government purchases, creating more money out there.
Jim Barnes: That should be a form of QA. And then chairman Powell once again pushed back today said, no, our, our objective is to provide liquidity. We’re trying to manage reserves and simply so that the transmission of policy kind of gets to where we needed to go through the overall banking system. But the worst, some questions about the correlation between the balance sheet increasing at the same time the equity markets are going higher and chairman pellet kind of pushed that to the side and said well there are a number of factors that will impact equity prices. So he didn’t want to isolate just the growing in the balance sheet as the as the ultimate factor in our view. Probably the biggest thing and the biggest disconnect and eventually it has to be worked down is that even though there was no change in policy today and again that was very, very highly anticipated.
Jim Barnes: At some point in the future the fed is going to have to do something. Either they’re going to have to raise rates or they’re going to have to lower rates. We got to sort this out cause right now based on the summary of economic projections, if you were to ask the federal reserve, they would say that the next move based on what their thinking is, would be up that 75 basis points of rate cuts at the end of 2019 should be enough to go ahead and support growth going forward, pick up of inflation, which should warn higher rates at some point down the road. Well the financial markets, they said, no, no, no, no, no, we don’t agree with that. We think that that the economy’s weak enough where at some point this year we should see another, another additional 25 basis point rate cut. So that’s a disconnect that’s currently out there.
Jim Barnes: I think in our view, given what we’re seeing on the manufacturer front and the stabilization of some of the global economic data, and that should bolster the case. That bed policy right now is accommodative enough to keep economic growth going in the, in the same upward position. But we’re going to have to see how this all plays out going forward. With that being said, again, this was just the first meeting of the year. Very much look forward to to give me recaps going on for 2020 as always, if you have any questions at all, please visit [email protected] again, this is Jim Barnes, director of fixed income and Bryn Mawr Trust. Very much appreciate your time.
Closing: Thank you. This has been a production of Bryn Mawr Trust. Copyright 2020. Visit us online at bmt dot com forward slash wealth.
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