The Federal Reserve said Wednesday that it will keep interest rate cuts on hold for now. Looking into 2020, it may have to do the same, although the end of 2020 could tell a different story.
Stocks have risen in the past few days, with the S&P 500 up 0.7% in the past five, as the U.S. and China look somewhat close to a trade deal. A deal would reduce the likelihood of one or multiple interest rate cuts in 2020 as it would provide a boon to economic growth. Stock investors seem to have already digested the Fed’s position, but have taken solace in the fact that the central bank has made it clear it will lower rates in 2020 if the economic data demands action.
Bond investors have priced in the Fed’s pause, as the benchmark 10 year treasury yield is up since the Fed’s October meeting, where Chairman Jerome Powell said the bank will put cuts on hold. The bond is up to 1.81% from 1.68% on October 31.
For 2020, “if Jay Powell had his druthers, the Fed would do a whole lot of nothing in 2020 — I really do think that they want to be in a holding pattern,” said Danielle DiMartino Booth, founder and CEO of Quill Intelligence and former adviser to the president of the Dallas Fed. “I think a lot of it will come down to how much disruption there is towards the very tail end of this year and some of the repo madness that we saw in mid September.” She was referring to the recent spike in short term rates, which the Fed had to correct in order to keep economic prospects stable.
Many think there is a 20% or 30% chance of recession by the end of 2020, so if that probability looks to be closer to a certainty by mid 2020 the Fed may have to cut rates, although it only has a few more rate cuts at its disposal.
Currently, the market isn’t focused on monetary policy, but it may become highly interested in Fed actions again soon as the economic cycle continues to age and the effectiveness of monetary policy wears off.