Fed steady with a slight chance of a rate cut

I hear ya! US Fed Chairman Jerome Powell had already come out declaring something along these lines at his first outing for 2018.

Still, it's more comforting to have all the members of the Federal Open Market Committee (FOMC) put their imprimatur in black and white.

Yes, Virginia. We got it! It's there in the minutes of the 18-19 December FOMC meeting.

First things first. The minutes explained the rationale behind the Fed's 25 basis point lift - that took the fed funds rate up to 2.25%-2.5% -- at the December powwow:

While "...participants generally judged that the economy was evolving about as anticipated, with real economic activity rising at a strong rate, labor market conditions continuing to strengthen, and inflation near the Committee's objective".

No problems here. US GDP expanded by 3.0% in the year to the third quarter of 2018, up from 2.9% in the previous quarter and the fastest growth rate since the September quarter of 2009 (3.2%).

The US labour market remains solid, punctuated by the surprisingly stronger-than-expected 312K jump in non-farm payrolls in December (versus consensus predictions for a 180K gain). While the unemployment rate has ticked up to 3.9% from the 49-year low of 3.7% recorded in November, this is attributed to the increase in the participation rate to 63.1% from 62.9%.

On inflation, the Fed's favoured inflation measure - the core PCE price index - stood at 1.9% in the year to November whereas the core CPI inflation stood at 2.2% over the same month. The positive correlation between these two measures and the lead from rising wages - average hourly earnings rose by 3.2% year-on-year in December (the fastest rate since April 2009) - supports the Fed's statement that "the economy was evolving about as anticipated".

...and that, the "increase in the target range at this meeting, the federal funds rate would be at or close to the lower end of the range of estimates of the longer-run neutral interest rate".

All well and good but where to now brown cow?

"With regard to the outlook for monetary policy beyond this meeting ... participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier.

Against this backdrop, many participants expressed the view that, especially in an environment of muted inflation pressures, the Committee could afford to be patient about further policy firming."

How patient? Fed funds futures trading shows that US interest rates would remain unchanged through to the end of 2019 - with a small chance that the Fed could CUT rates by 25 bps this year or the next.

Read more: US Fed Chairman Jerome PowellDecember FOMCFederal Open Market CommitteeCPIUS GDPVirginiaYes
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