The Federal Reserve Open Market Committee (FOMC) once again held their target for overnight interest rates unchanged in the month of January, the second-consecutive pause decision following a round of three insurance rate cuts in 2019.

  • The Federal Reserve maintained its target for overnight rates at a range of 1.50%-1.75%, continuing the pause begun in December
  • Following economic risks from the coronavirus outbreak, markets are pricing approximately 1.5 rate cuts in 2020
  • The Fed hopes to be on hold for the foreseeable future, although we expect market plumbing problems will tip the Fed’s hand
  • New 2020 FOMC voting roles include the addition of one uber-dove (Kashkari) and a pair of hawks (Kaplan and Mester)

Powell and the “primary” policymakers have been clear on their intentions to hold rates steady for some time, though we continue to believe volatile financial conditions are likely to force the Fed’s hands into additional rate cuts in 2020. The recent market response to the Wuhan coronavirus outbreak is an excellent case study: Credit spreads widened surprisingly aggressively, moving nearly as far in three trading days as they did in all of May 2019 in response to trade war escalation. Widening spreads (i.e., higher costs of credit) are the major input into the Fed’s estimates of financial conditions, and are likely to be more volatile in 2020 as banks in particular have levered up in Treasury markets rather than deploy capital into private sector lending. That volatility essentially increases the odds of a Fed response, particularly given the extended nature of the credit cycle.

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Guy LeBas

Director, Custom Fixed Income Solutions

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