The difficulty in submitting columns right before the U.S. Federal Reserve (Fed) announces its Open Market Committee decision on interest rates is that by the time you read this, the decision will already have been made. So, as always, let me make predictions of where I think the Fed will go this meeting and where I believe it will continue to move in upcoming meetings, and you can judge whether I got it right or not.
Last year was all about the Fed setting up expectations for increasing interest rates. It raised rates 4 times, a total of 100 basis points, and projected 4 additional rate hikes in 2019. So far this year the Fed hasn't raised rates at all, and no one expects a rate hike this meeting. This would mean that over the next six meetings remaining in 2019 the Fed would have to hike rates nearly every meeting to hit its targets announced only three months ago. Of course, for those of you who read my columns last year, you'd know that I had predicted the Fed could not possibly abide by this timetable and wouldn't. I suspect the Fed will be hard-pressed to hike rates at all in 2019, and the Fed will allude to a more accommodating climate in the Fed's decision to be released after this column goes to press.
The European Central Bank (ECB) has signaled it will continue to be dovish when it comes to "normalization" of interest rates as the Eurozone has yet to post numbers that would warrant rate increases or winding down balance sheet positions. In short, the Eurozone is hurting. Germany is on the cusp of a recession, and there is little good news as of yet. Italy and Greece continue to disappoint; while there may be a sliver of good news from Spain, exports have pulled back and domestic demand has been surprisingly robust.
In the run-up to Brexit, which is almost certainly going to be delayed until June it appears, the Eurozone will continue to suffer. With only 8 days remaining before the U.K. is forced to leave the EU, a deal is almost certainly off the table at this point and thus an extension is the only possibility. In this climate, the ECB can't raise rates nor does it intend to, and the Fed would harm U.S. firms and employment if it chose to raise rates as well. For these reasons, any rate hikes in the near term are off the table. Should inflation fall off a cliff in the coming quarters as it may do, then the U.S. will face the struggles that the EU currently faces and that Japan has faced for nearly two decades.
The Fed will do everything it can to prevent a low growth/zero-inflation environment, and to that end will begin cutting rates in 2019. This meeting will be characterized by signals of accommodative policies until at least the end of 2019 and cautious optimism for 2020.