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Senior Economist Alvin Liew at UOB Group assessed the recently published FOMC minutes for the January 28-29 meeting.

Key Quotes

“In the January 2020 FOMC minutes release (19 Feb), the Federal Reserve officials ‘concurred that maintaining the current stance of policy would give the Committee time for a fuller assessment of the ongoing effects on economic activity of last year’s shift to a more accommodative policy stance’ and viewed current stance of monetary policy as likely to remain appropriate ‘for a time’, indicating they could leave interest rates unchanged for a few months.”

“That said, the discussion inside the minutes mentioned the coronavirus (COVID-19) eight times, with the virus outbreak warranting ‘close watching’, and therefore in our view, prominently outlining the risk as the latest threat to global and US growth (even though the Fed only had a week to assess the COVID-19 risk in the 28/29 Jan FOMC after the coronavirus news hit the wires).”

“Besides the COVID-19 virus risk, Fed policy makers continued to hold a positive growth outlook… The FOMC participants cited easing of trade tensions, receding risks from Brexit and stabilizing global growth as reducing downside risks but generally expected trade uncertainty to remain somewhat.”

“The minutes also indicated support for a mild overshoot of the 2% inflation target… This suggests that the Fed have not seen the need to pre-empt rising prices. Recall during FOMC Chair Powell’s post-FOMC press conference, he emphasized the Fed’s dissatisfaction with inflation running below 2%.”

“The Fed officials also discussed substantively about the possibility of transforming their inflation target into a range within their ongoing framework review which began early last year (2019), a review meant to assess whether the Fed has the right tools and strategies to deal with persistently low interest rates and low inflation.”

“In contrast to the market view of a more prolonged Fed pause… we still expect the Fed to implement the next 25bps rate cut in 1Q 2020 at the March FOMC as another insurance cut in view of the potential risks of US trade policy uncertainties, Middle East geopolitical tensions and the latest being the coronavirus outbreak in China. Conversely, if all these risk factors do not materialize, then the “insurance” cut will be unnecessary. The view remains for the Federal Reserve to keep policy rates low or even lower in 2020.”