The bank's interest rate committee expects US economic growth to continue, especially as the labor market continues to perform well. The news of the China-US partial trade deal, Fed chairman Jerome Powell, called it "potentially positive." A rather reserved response.
Apparently the Fed is also not sure that the agreement will have major consequences if it is implemented. Or even that it is implemented. With his comment that 'uncertainty remains high', Powell underlined the Fed's skepticism about the agreement. Chinese economic growth is facing a lot of headwinds and the effect of the corona virus may be added this year. The US will certainly notice a further slowdown in growth, Powell said. But less than in other Western countries, because the US is a relatively closed economy.
Take interest rate reduction into account
Powells posted comments that it is "important to keep the expansion going," inflation is too low (which the Fed is not happy with) and that if expectations of too low inflation take hold it will be harmful "as we have seen elsewhere to have'. That last addition is of course referring to Japan. From this it can be concluded that it will take a long time before we get the news that the Fed is raising interest rates. The bank seems to want to keep the interest rate unchanged this year, something that in my view will not work. It is better to take into account more than one interest rate cut by the Fed this year.
The labor market may be doing well, but the economy has quite a few underlying problems. This means that the Fed is not slowing down and is more likely to accelerate. This can also be seen in the Fed's speed in responding to problems in the money market. While the bank quickly established support for that market, Powell said the Fed "believes" it can gradually reduce that support starting this summer. The Fed previously indicated that it would dismantle that support at the end of January.
Monetary strategy
Finally, the Chairman said that asset prices are a little on the high side. “Valuations are high, but not extreme,” according to Powell. The phasing out of support for the money market can start from the summer. By then it will be clearer whether the partial trade agreement between China and the US will make headway. Whether the economic recovery after the dip will indeed continue and what the Fed's evaluation of the monetary strategy has in store. As a result, it promises to be a very interesting monetary summer. If not a hot summer.