One of the reasons why I love FOMC meeting days is how market pundit after market pundit fall over themselves leading up to the meeting announcement, telling us what the Fed is going to do or should do. In the case of today’s first meeting of the year, the decision was to leave the official fed funds target range unchanged at 5.25-5.5%. That was not a surprise, but pundits were also clamouring for the Fed to steer us to a rate cut at the next meeting in March. Some even think the easing should start now, given that there has been so much progress on the inflation front.

 

Fortunately, the Fed doesn’t have to do what the talking heads say and that was the case today.  While Fed officials see risks to its dual goals of full employment and price stability as “moving into better balance” and they removed reference to the potential for additional policy firming, the statement still mentioned that that officials “don’t see cuts until they are more confident inflation is nearing 2%”. Note, the Fed also removed its reference to tighter financial conditions, and for good reason. The Bloomberg Financial Conditions Index has hit the highest level in two years.

 

 

This is important, especially given the recent stream of economic indicators that have been more suggestive of resilience than an economy teetering. In other words, the Fed has room to take measured policy adjustments and doesn’t have to rush. That doesn’t mean a March cut is off the table and there are two employment reports and two CPI releases before we get to that meeting. If both show cooling growth and a continued drift in inflation towards 2%, then probability of a cut would rise. If not, rate-cut pundits will be disappointed.

 

Ally and I still believe that the first move will likely be May and even possibly June, with cumulative easing this year of 0.5-1%.  That is still supportive for risk assets and the bond market, however, equity bulls did not like the wording of  the statement and we are likely to see some near-term volatility before we continue the uptrend in stocks. 

 

On behalf of the Pyle Wealth Advisory team, have a wonderful rest of the week.   

 

Andrew Pyle

 

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Andrew Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough. The views of Andrew Pyle do not necessarily reflect those of CIBC World Markets Inc.

 

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