This week Federal Open Market Committee (FOMC) participants left the target federal funds range unchanged at 1.50 – 1.75 percent at its December meeting. A mix of strong labor conditions continued weakness in business investment activity and sluggish global growth did not warrant policy change.

The Committee still expects U.S. economic growth to slow but stabilize near 2.0 percent in 2020. Fed officials reiterated expectations for inflation to approach 2.0 percent as strength in the labor market flows through economic channels. In his press conference, Chairman Powell said the Fed would have to observe “a significant and persistent” increase in inflation to raise rates. While monetary policy remains data-dependent, the Fed’s baseline forecast is to leave its policy rate unchanged through 2020.

Market participants who hoped for dialogue about the Fed’s role in the repo market during the press conference were disappointed. Chairman Powell reiterated that Fed officials believe the current monetary policy mix is sufficient to prevent year-end repo market funding stress. However, he acknowledged they stand ready to increase the size and scope of balance sheet accommodation if necessary.

Although we found the FOMC statement and subsequent press release dry, Chairman Powell did entertain us with the difference between quantitative easing and open market operations. According to officials, the purchase of Treasury bills that do not issue coupons does not qualify as quantitative easing. Only Fed purchases of coupon-bearing Treasuries constitute quantitative easing. As such, while the Fed purchased more than $300 billion non-coupon bearing Treasuries since mid-August, Fed policymakers insist these purchases do not constitute quantitative easing. We say tomato; you say tom-ah-to!

The S&P 500 Index was unchanged following the FOMC statement release and subsequent press conference, but Treasury yields shifted four basis points lower. Overall, we believe the market response appeared muted. Looking ahead, we remain focused on key sources of latent risk to asset prices: growth, inflation and the corporate earnings outlook in 2020.

Prepared by Broadridge Investor Communication Solutions, Inc.

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