Page 10 - ISQ UK JANUARY 2020

INVESTMENT STRATEGY QUARTERLY

“ In contrast to consumer confidence, which has remained

elevated, business sentiment weakened in 2019. ”

In 2019, the Fed made a comprehensive review of its monetary
policy strategies, tools, and communication practices. This KEY TAKEAWAYS:
review included academic conferences and town hall meetings. • Many of the 2019 uncertainties seem likely to
Some changes may be announced in 2020, but probably continue into the first half of the year, but the
nothing major. One possibility would be a ‘catch-up’ policy, downside risks to the growth outlook appear to
where inflation would be allowed to move above the 2% target be less worrisome.
for some specified period if it had fallen below 2%. However,
comments from officials make this doubtful. The Fed has also • Trade policy uncertainty and slower global growth,
been reviewing its strategies for fighting a recession. The Fed the two negative factors most widely cited across
normally lowers the federal funds target rate by 500 basis points manufacturing industries, may continue to some
during a recession. Given the proximity to the effective lower extent. In contrast to consumer confidence, which
bound (0-0.25%), the central bank should be more aggressive has remained elevated, business sentiment weak-
in lowering short-term interest rates, moving sooner and ened in 2019.
making larger cuts than it would otherwise. Officials have ruled • Fed policy is expected to remain on hold until we
out negative interest rates, but would rely on forward guidance get a material change in economic conditions.
and further asset purchases if warranted.

In town hall meetings, Fed Chair Powell was particularly impressed
with the comments of those from low-income communities.
These communities had been largely bypassed during the
economic recovery, but were now seeing increased opportunities
and the benefits of a tight labour market. With inflation below
the Fed’s 2% goal, monetary policy is expected to remain
accommodative for an extended period.

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