Fed Thoughts: Interregnum

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January Fed Thoughts

Vincent Reinhart

Vincent Reinhart - Chief Economist & Macro Strategist

We almost forgot that the Federal Open Market Committee meets on January 30th-31st. That is understandable, as the chance of any significant news from the Federal Reserve at the conclusion of the meeting is remote. According to the latest federal funds futures quotes, the probability of a change in the policy rate this month is about 3 percent, which is basically rounding error in financial markets. We have arrived at this conclusion for a few reasons.

 

First, Fed officials view surprising investors as anathematic. In 2017, a strong foreshadowing of action appeared in the minutes of the meeting prior to the four actions of the year (three on the policy rate and one on the balance sheet). If that was not sufficient warning, officials worked hints into their public remarks and probably guided some journalists to the appropriate conclusion.

Second, in the modern era of four press conferences a year, FOMC participants have reserved action for those occasions when the chair could explain it to reporters. The other four meetings have become unloved orphans—such as the upcoming one. Indeed, the market-implied probability of action at the first meeting of the year has been approximately zero for the past year, in that the pricing of the December 2017 and January 2018 fed funds futures contracts have been virtually identical. That is, the corpse of the January meeting has no pulse.

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