Dealing with an accident-prone Fed

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House View

The Fed’s abrupt change in guidance at the end of January proves a point we’ve made regularly in this House View: the Fed was at risk of making a policy mistake, but reversed course on time. After talking about further gradual rate rises in December, the Fed has put that plan on hold. What now? We believe one more hike is possible in 2019, but it will depend on certain political outcomes this year. Specifically, we think the Fed will wait for clarity about exogenous events (Brexit, the US-China trade talks), and then factor in the economic data. Clearing the decks before making its next move — that’s what the Fed is focused on, in our view. Therefore, we’re not giving that much credence to the dot plots right now: They could be useful in understanding what the Fed thinks might happen, but not in understanding when it might raise rates.