Asian Stocks Mixed After Fed; Focus Moves to Trade: Markets Wrap

Andrew Cummings
December 12, 2019

The Federal Reserve is expected to maintain its target interest rate range at between 1.5% and 1.75% on Wednesday afternoon when it releases its post-meeting statement at 2 p.m. Investors will be watching for any surprise changes to rates and indications from the Fed about where rates could be heading in 2020 after three rate cuts in 2019.

The Fed is due to announce its latest decision, along with a new set of economic forecasts, at 2pm local time (1900 GMT) on Wednesday, followed by a news conference by Fed Chairman Jerome Powell shortly afterward.

In assessing the appropriate path for future rate decisions, the central bank said it will continue to monitor the implications of incoming information for the USA economic outlook, including global developments and muted inflation pressures.

After cutting rates three times earlier this year, the Fed left its benchmark rate at the target range of between 1.50% and 1.75%, a decision that was widely expected.

The U.S. economy expanded at an annual rate of 2.1 percent in the third quarter this year, slightly up from the 2-percent growth rate in the second quarter but a sharp deceleration from 3.1 percent in the first quarter, according to the U.S. Commerce Department. -China trade war. Those tariffs don't appear to be having an inflationary impact yet.

Many economists have said they think sluggish growth will even compel the Fed to cut rates at least once next year.

"Inflation continues to run below symmetric 2% inflation", he said, but the Fed participants expect inflation to increase to 1.9% next year and 2.0% in 2021.

But in a key change to the policy statement, the FOMC said officials "will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures".

Powell and other Fed policymakers have made clear that they are no longer anxious that a healthy job market will necessarily fuel excessive inflation.

"We're in a wait-and-see mode going into Friday to see if we have any more clarity on the trade tariffs that go into effect on Sunday", said Keith Buchanan, portfolio manager at Globalt Investments. Measures of consumer confidence also remain at historically high levels.

Fueling that expectation is the growing belief of Fed officials that inflation will remain tame even as the economy keeps growing modestly and the job market remains solid. That suggests that the Fed's rate cuts have made it easier for consumers to borrow for big purchases. The Fed raised its benchmark short-term rate four times in 2018 after growth began the year at a healthy pace. The neutral rate typically shouldn't change very often or very much. A year ago, the Fed thought it was 4.4%.

Fed policymakers are also weighing their options to stabilize short-term lending in money markets.

The Fed could eventually expand its Treasury bill purchasing program to shorter-term coupon debt, he added.

As a result, economists say the Fed may lower its estimates of full employment and the neutral rate to better reflect how low unemployment and inflation have remained.

Powell maintains that the purchases are meant to improve the functioning of the financial system and not to ease borrowing rates.

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