The US Fed will be meeting today and our focus will be on two key words i.e. “patient” and “flexible” which could be raised in its statement at the conclusion of the policy meeting. Currently, the Fed is experiencing numerous challenges and uncertainties as the economy moves ahead. This has raised questions as to how it can land the policies and make the policies work. There are uncertainties from Brexit, the euro outlook and trade tension between the US and China. The only certainty for now is that the Fed will hold the policy rate at 2.25%–2.50% in this meeting.

With the potential outlook looking hazy, the other area of focus will be on the direction of its balance sheet, as to whether the Fed will continue to unwind or take a break. The outlook of Fed’s balance sheet has been on “autopilot”, declining by US$50bil a month. If the unwinding QE trend continues, estimation suggests that it will effectively raise rates by 0.8ppt to 0.9ppt from the current Fed fund rate. If the Fed does not provide any signal to change its current balance sheet reduction programme in today’s statement, we can possibly take a cue that rate hikes could be slower, especially if the data is weaker than expected.

• The US Fed will be meeting today and our focus will be on two key words i.e. “patient” and “flexible” which could be raised in its statement at the conclusion of the policy meeting. Currently, the Fed is experiencing numerous challenges and uncertainties as the economy moves ahead. This has raised questions as to how it can land the policies and make the policies work.

• A range of uncertainties which the US economy and Fed cannot avoid starts with Brexit that is due to happen on March 29 with or without an agreement for the UK’s departure from the European Union. Also, the economies of the EU members are stumbling, with Germany’s GDP having shrunk in 3Q2018. Trade strains between the US and China remain with the US threatening to hike tariffs on US$200bil of Chinese goods to 25% from 10% if current talks fail to produce progress by March 1.

• On the US side, even before the just-ended partial US government shutdown, the economy showed signs of slowing from the fiscal stimulus. Now, with the partial shutdown, it is expected to distort the economic data and cause some havoc to the data-dependent Fed. Though the shutdown has ended, it is not over. It can start again in February when the current government funding legislation expires.

• The only certainty in our view comes from the US Fed which is likely to leave the federal funds target range unchanged at 2.25%–2.50%. Our base case scenario for now suggests there is some room for a 1 or 2 rate hikes, much depends on the strength of the potential incoming data. Still we have placed a 30% chance for the Fed to institute a U-turn on its rate hike storyline to a halt or even a cut, especially if the potential incoming data turns weaker than expected suggesting a heightening risk of recession with a low inflation environment.

• With the potential outlook looking hazy, the other area of focus will be on the direction of its balance sheet, as to whether the Fed will continue to unwind or take a break. The outlook of Fed’s balance sheet has been on “autopilot”, declining by US$50bil a month. If the unwinding QE trend continues, estimation suggests it will effectively raise rates by 0.8ppt to 0.9ppt from the current Fed fund rate. If the Fed does not provide any signal to change its current balance sheet reduction programme in today’s statement, we can possibly take a cue that rate hikes could be slower, especially if the data are weaker than expected.

Source: AmInvest Research - 30 Jan 2019