The Fed Blinked

Why Restructuring Professionals Should Care

Back in October we asked when the training wheels should come off the bicycle that is the U.S. economy with respect to normalizing monetary policy. We have since gotten an oblique answer of sorts from the Fed, specifically the Federal Open Market Committee (FOMC)—not now.

Despite Chairman Powell’s insistence that political considerations “have played no role whatsoever in our discussions or decisions about monetary policy”, it’s hard to read FOMC meeting minutes and comments from Powell since late December without concluding that the Fed has yielded to the forces of financial markets and the White House, which were both urging the Fed to back off. Characterizing the sudden pause by the Fed as a capitulation is a widely held opinion expressed by many prominent market commentators in recent weeks. A more dovish tone was first articulated in Powell’s press conference of December 19th following the committee’s decision to raise the targeted Fed Funds rate by 25 basis points. Powell referenced “some crosscurrents” that have emerged that suggested moderating global economic growth which would “give the Committee the ability to be patient in moving forward.” He has since used the word “patient” several times in reference to policy around rate hikes. Chairman Powell also reduced the number of expected rate hikes in 2019 to two from three in his comments.

In fact, these crosscurrents, mostly occurring on the global stage, have been in place for many months but hadn’t previously given the Fed pause with respect to expected rate hikes or its scheduled balance sheet runoff. It was also unusual to hear a Fed chair cite economic developments abroad as a consideration for U.S. monetary policy. On the domestic economic front, Powell’s comments continued to laud the strength of the U.S. economy.