On the December FOMC

Donald L. Luskin
Wednesday, December 11, 2019
“Uncertainties” are gone. The Fed is on hold until it sees unwelcome inflation pressures.
Federal Reserve
US Macro
US Stocks
US Bonds
“Uncertainty” is gone from the statement language, and from the Fed’s policy outlook. The “dot plots” show near unanimity for no rate changes in 2020. Powell insists that policy now is “somewhat accommodative.” We don’t agree, with the yield curve now flat (but at least not inverted anymore). Happily, Powell is not looking to hike rates as the “uncertainties” he was focused on clear away. He thinks hikes won’t be necessary until “sustained inflation pressures” are visible – indeed, he would welcome some degree of inflation pressures. Even if policy is not actually accommodative now, if policy remains static, and the economy accelerates, policy will effectively become more accommodative. We think the market reaction has been too muted, and that the Fed definitely on hold ought to support higher stock prices and bond yields.