The Fed’s New Years Resolution: Be More Dovish

Fed Chair Powell kicked off the dove-fest last Friday with his remarks at the American Economic Association’s annual meeting. He said all the right things that markets wanted to hear.  Powell’s December statement and press conference spooked markets into believing that the Fed was on a preset path to raise rates twice in 2019, regardless of the economic environment. Last Friday, he indicated that the Fed was “flexible” and could be patient in light of “muted inflation readings”.  Another buzz word is emerging: “Patience” as the Fed will “listen very carefully” to the market. Powell also addressed the issue that many believe triggered the major volatility during his December speech: the pace of balance sheet reduction. Now he “wouldn’t hesitate” to alter the pace of reduction based on current events. Powell stood with past Fed Chairs Bernanke and Yellen at the Friday event. Perhaps he and Bernanke discussed the “taper tantrum” sparked by Bernanke’s remarks in 2013 regarding potential slowing of bond purchasing by the Fed. Markets rallied big on Friday. This week, other Fed participants have reinforced the message, indicating flexibility and patience. Futures markets indicate zero or one increase in 2019 and a possible rate cut in 2020. The 10 year Treasury dropped to 2.55% last Thursday (pre-Powell remarks) and has now settled at 2.70%. Markets are watching Washington: Government shutdown (how long?) and trade talks with China (is a deal imminent?). Spreads have widened during this recent volatility. The CMBS market is looking for guidance from the first few securitizations of 2019 now under way. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners