U.S. Federal Reserve chairman Jerome Powell is expected to announce a pause in raising borrowing costs this week, taking a more cautious position on policy after his last decision and accompanying remarks on interest rates sparked a major sell-off in markets.
In December, when the Fed hiked its benchmark interest rate for the fourth and final time in 2018, the stock market responded with an emphatic thumbs down. The S&P 500 turned lower during Mr. Powell’s news conference and racked up a cumulative loss of 7.7 per cent over a four-day span.
With trade wars, slowing global growth and the government shutdown also weighing on investor sentiment, it was beginning to look like the decade-long bull market was finally coming to an end.
But the December sell-off also marked a turning point in the Fed’s tone. At a panel discussion in early January, Mr. Powell offered some soothing words for rattled investors.
“We’re listening … sensitively to the message that – that markets are sending,” he said. “And we’re going to be taking those downside risks into account as we make policy going forward.”
In recent weeks, Fed officials have repeated Mr. Powell’s comforting message that the Fed can afford to be patient with rate hikes. Markets have responded with a powerful rally: The S&P 500 has surged 13.3 per cent from its Dec. 24 low and and the S&P/TSX Composite Index has gained 11.5 per cent, putting the bull market back on the rails.
With the recovering stock market as the backdrop, the Fed will almost certainly reiterate its patient position this week when the central bank holds its two-day meeting, culminating with its interest-rate announcement on Wednesday. Not only is the Fed widely expected to hold its benchmark rate steady, but the Federal Open Market Committee’s statement and Mr. Powell’s news conference will likely emphasize the newly dovish tone.
“Clearly, he understands that he needs to provide some sort of support to the stock market,” Benjamin Tal, deputy chief economist at CIBC World Markets Inc., said in an interview. After a 10-year rise in equity prices, “market stability is extremely important to the economy. If you look at the equity position of consumers, it is at a record high now. So a market meltdown can actually have a significant macroeconomic impact.”
In its December statement, the Fed had left the door open for additional rate hikes in 2019, saying that “some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the committee’s … 2-per-cent objective over the medium term.”
Josh Nye, senior economist with Royal Bank, said the Fed could tweak the language in Wednesday’s statement to reflect its more accommodating position.
“I think the question is do they water that down even further and become more explicit in terms of saying that they are going to be very much data-dependent or patient,” Mr. Nye said in an interview.
“Whether they do change … the statement will be an indicator of whether they’re still comfortable guiding markets to some further rate increases. Right now markets really aren’t pricing in much, if any, tightening at all from the Fed going forward.”
For its part, Royal Bank still expects two quarter-point increases in the Fed funds rate this year – one in June and a second in December – given the strong U.S. labour market and its potential impact on inflation. The target range for the Fed funds rate is currently 2.25 per cent to 2.5 per cent.
“Whether we see some additional upward pressure on wages in 2019, and whether that starts to feed through into inflation a bit more, I think will be a very important indicator in terms of how much further the Fed goes in tightening,” Mr. Nye said.
In that regard, Friday’s January U.S. employment report will be in focus. Coming off a strong December when the U.S. economy added 312,000 jobs, non-farm payrolls are expected to grow by 160,000 in January. Another key data point – the advance report on third-quarter U.S. gross domestic product – is scheduled for release on Wednesday morning but could be delayed because of the partial government shutdown, despite last week’s agreement to temporarily reopen the government.
It will also be a busy week for fourth-quarter earnings, with Apple Inc. scheduled to report on Tuesday; Facebook Inc., Boeing Co., McDonald’s Corp. and Microsoft Corp. on deck for Wednesday; and Amazon.com Inc. and General Electric Co. up on Thursday.
In Canada, earnings include Canadian National Railway Co. and Metro Inc. on Tuesday; Open Text Corp. on Thursday; and Imperial Oil Ltd. on Friday.
On the Canadian economic calendar, Thursday’s November GDP report is expected to show a contraction of 0.1 per cent, according to Bank of Montreal.
“November was an ugly month for the Canadian economy, with weakness almost across the board,” BMO economist Benjamin Reitzes said in a note. “Manufacturing, wholesale and retail activity contracted in the month, while international trade flows were down as well. And, existing home sales dropped for a third straight month.”