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The Fed's Decision

Commentaries & Views

The Federal Reserve caved. In their policy statement yesterday, they said, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

In a statement with several notable changes this stands out as it not only emphasizes their willingness to be ‘patient’ but implies that the next interest rate move could just as likely be lower as higher. A day late and a dollar short. Right here, through the last 45 days of 2018, we pounded the table that a shift in rhetoric was necessary to combat dissipating tailwinds and fresh headwinds for growth. Their failure to do so at that time created an air-pocket within liquidity and the result was December’s bloodbath.

The market, as it always does, overshot the downside. It does not take a genius to understand that inflation was not rising through much of last year and slipping commodity prices in the second half added downward pressures. Furthermore, the international trade conflict was the sole catalyst in rising producer prices. Individually, the members’ rhetoric made a clear shift in January and this did a significant amount of the heavy lifting as risk-sentiment responded in the first 30 days of the year; the S&P was up 5.3% on the year as of Tuesday’s close, before the conclusion of the Fed’s policy meeting.

Although the economic calendar was slimmed down due to the government shutdown, the data we did get was not bad. The December jobs report was arguably the strongest in years and Flash PMIs for January last week showed a steady bounce back from Q4. Additionally, earnings have been good with the only negative theme being uncertainty tied to China and the trade war. Boeing, a bellwether for international growth had a blowout fourth quarter.

Please do not misunderstand our argument here, growth headwinds and uncertainties persist but the Fed must be proactive and not reactive. Taking a step down dovish lane only sets their rhetoric, and the market for that matter, on another crash course like the one set in October. Our only justification for such would be imagining that the Fed wants a mulligan. So, when we say that the Federal Reserve was a day late and a dollar short, they were wrong in December and they were wrong again yesterday.

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