In this briefing:
1. Fed Policy in 2019: Low Inflation Complicates an Uncertain Outlook
The current tone of incoming US economic data is, once again, at variance with the behavior of financial markets, whereby the data dynamic is in apparent reversal of the disconnect that prevailed when the Fed deployed ultra-accommodative policy settings.
Fed Chair Powell will not wish to convey the impression that policy is being dictated by financial markets, while firm labour demand would seemingly rule out a pause in rate hikes.
As 2019 unfolds, the persistence of low inflation, despite faster economic growth, could potentially offer the Fed some breathing space to pause raising the federal funds rate at the Federal Open Market Committee (FOMC) meeting in March.
The long-standing dichotomy in inflation trends for goods and services remains intact, while the FOMC will be paying careful attention to prospective movements in rental costs and health care for indications of future inflation momentum.
Although falling oil prices may have helped to keep inflationary expectations well-anchored, Fed policy credibility and the rising dollar exchange rate probably played more dominant roles.
The US monetary policy outlook in 2019 will become more uncertain due to a confluence of factors, but the FOMC will require faltering economic data in Q1 to justify a pause in raising the federal funds rate in March.
