MNI PREVIEW: Fed On Hold As Global Risks Fade, May Update Repo

--Ex-Officials Say Rates May Be Steady Through 2020

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve is expected to hold the benchmark

interest rate in a 1.50% to 1.75% range Wednesday with the U.S. economy in a

"good place" and geopolitical risks fading.

     Recent data have been upbeat including healthy job growth and consumer

spending, while global strains that triggered three cuts last year have

diminished. The Phase One trade deal with China should stem the yearlong

manufacturing decline, the U.K. is formally cleared to leave the EU at the end

of the month and a larger Iran crisis has settled down. 

     Fed officials have said last year's cuts are enough to stabilize the

economy while they remain concerned about muted inflation and the risk of

sagging price expectations. That view is unlikely to change even with the FOMC

adding new voices for the panel's first decision of 2020, and former Fed

officials said the outlook could be stable enough for no rate changes all year.

     It would take a "surge of inflation into undesired territory" to get the

central bank back on a tightening path, former Atlanta Fed President Dennis

Lockhart told MNI. "Policy is set for a while." 

     The meetings may deliver more of a shift in managing the Fed's balance

sheet and efforts to ensure smooth trading in repo markets. 

     --RESERVES MANAGEMENT, NOT QE

     Fed Chair Jay Powell and others have pushed back against the notion that

recent interventions in the repo market and buying up billions of Treasury bills

amount to a shadow form of QE.

     The asset buys have grown the balance sheet to USD4.2 trillion, with some

worried the Fed is propping up frothy equity markets and lower-quality corporate

loans. Powell should update on the timing of concluding those purchases,

currently expected in April, and any plans to purchase coupons in addition to

bills. 

     Markets are watching whether the Fed will nudge higher its interest paid on

excess reserves to 1.60% to help center the effective fed funds rate in its

target range. The EFFR has been trading in a narrow 1.54%-1.55% band, close to

the bottom of the target range, since mid-December. 

     Although the committee continues to debate the design of a standing repo

facility, no imminent announcement is expected. 

     --FRAMEWORK REVIEW CONTINUES

     Policymakers will also continue discussions around the inflation targeting

framework and tools at the effective lower bound. The FOMC in December deferred

the annual update of its Longer-Run Goals and Monetary Policy Strategy until the

review concludes midyear.

     The framework review has spotlighted the persistence of below-2% inflation.

Officials have hinted at some move toward average inflation targeting while not

committing to any explicit framework. Internal research on the crisis-era tools

including asset purchases and forward guidance has been positive, signaling

increased willingness to adopt their use on a more regular basis. 

     Finally, January will see a regular rotation of regional Fed bank

presidents onto the 10-member rate-setting committee. New voters include Pat

Harker, Rob Kaplan, Neel Kashkari and Loretta Mester of Philadelphia, Dallas,

Minneapolis and Cleveland, respectively. 

     --GOOD PLACE

     The Fed can still point to areas of concern in the outlook as it holds

rates. Trade tensions between President Donald Trump and and European leaders

appeared to re-emerge last week as his impeachment trial began, and the IMF said

U.S. growth will slow as fiscal stimulus fades. The Fed may also point to risks

from an outbreak of coronavirus in China. 

     Former senior Fed official Laurence Meyer does not foresee the kind of

material reassessment needed to shift rates this year.

     "We are at a good place in the economy," Meyer said. "There's no reason to

expect that the Fed will change rates through this year," he added. "We're

approaching a soft landing."

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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