The Federal Reserve is set to make its first policy statement of the year on Wednesday, so this is as good a time as any to reiterate our view that the Fed is likely to keep short-term interest rates steady through 2020 and, while pressures will build, the Fed seems content to hold them steady next year, as well.

We still think monetary policy is far from tight, and the economy could easily withstand higher short-term rates. Nominal GDP – real GDP growth plus inflation – is up 3.8% from a year ago, and up at a 4.8% annual rate in the past two years, figures consistent with higher short-term rates.

But the Fed is very unlikely to raise rates given its fear of an inverted yield curve, its desire to see a period of inflation in excess of 2.0%, and its propensity to always find something going on elsewhere in the world that could, at least theoretically, lead to slower growth. Last year it was political wrangling over Brexit, fears of a trade war with China, and slower growth abroad. This year it could be Brexit again, and perhaps the coronavirus coming from China.

Meanwhile, with equities so much higher than a year ago and the economy growing at a moderate pace, the Fed will lack a justification for cutting rates.

In the background, the Fed is likely to continue to gradually increase the size of its balance sheet via repurchase operations after having (temporarily) ended Quantitative Easing in October 2014 and reducing the balance sheet (Quantitative Tightening) starting in late 2015. The Fed restarted QE (without calling it that) near the end of last year, but even with the recent increases, the balance sheet finished 2019 at $4.13 trillion, still below the $4.45 trillion it hit during QE3.

And yet the S&P 500 is up 66% since the end of QE. By contrast, the Euro STOXX 50 is up only 25%.

What makes this so important is that it flies in the face of the theory that QE is behind the increase in equity prices. While the Fed pulled back, the European Central Bank continued expanding its balance sheet and even implemented negative interest rates in an attempt to stimulate the Eurozone economy. If QE and negative rates were so powerful, it should be US equities that lagged, not European equities.