When it comes to monetary policy, one thing looks certain for 2019 - journalists, pundits, investors, and analysts will pay it way more attention than it deserves. The spotlight is currently on Wednesday, when the Federal Reserve will issue their first statement of the new year. The consensus expects no changes in rates, and we agree.
What would justify heightened concerns? If investors believe monetary policy is about to get overly tight. But that point is still a long way off. Nominal GDP – real GDP growth plus inflation – is up at a 4.8% annual rate in the past two years, well above the 2.375% target for the federal funds rate or the 2.40% the Fed pays banks to hold reserves.
It's true, the Fed is also reducing its balance sheet, but it is doing so at a gradual pace of up to $50 billion per month. That "up to" part is important because in many months the Fed will not have enough securities maturing to hit that $50 billion figure. On top of that, reports suggest the Fed is rethinking how large to keep its balance sheet, potentially leaving it larger than many anticipated. We think that'd be a mistake, but, if anything, it would represent a looser stance for future monetary policy.
In the short-term, the Fed is likely to keep its language on assessing "realized and expected economic conditions," and Fed Chairman Jerome Powell will probably mention "data dependency" at the press conference following the meeting (the press conferences will now be held after every meeting, up from once per quarter).