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DiMeo Schneider & Associates

Investment Manager Research

In Focus: Fed Holds Steady, As Expected

December 12, 2019

This week Federal Open Market Committee (FOMC) participants left the target federal funds range unchanged at 1.50 – 1.75 percent at its December meeting. A mix of strong labor conditions continued weakness in business investment activity and sluggish global growth did not warrant policy change.

The Committee still expects U.S. economic growth to slow but stabilize near 2.0 percent in 2020. Fed officials reiterated expectations for inflation to approach 2.0 percent as strength in the labor market flows through economic channels. In his press conference, Chairman Powell said the Fed would have to observe “a significant and persistent” increase in inflation to raise rates. While monetary policy remains data-dependent, the Fed’s baseline forecast is to leave its policy rate unchanged through 2020.

Market participants who hoped for dialogue about the Fed’s role in the repo market during the press conference were disappointed. Chairman Powell reiterated that Fed officials believe the current monetary policy mix is sufficient to prevent year-end repo market funding stress. However, he acknowledged they stand ready to increase the size and scope of balance sheet accommodation if necessary.

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