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Will Fed meeting address government shutdown?

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federal_reserve_bankIn theory, the heat should be off the Federal Reserve's Open Market Committee (FOMC) at their upcoming meeting on January 29th and 30th. However, the partial government shutdown has given them a whole new area to worry about, not to mention a new opportunity to draw unwanted attention.

New concerns for the Fed

Having raised the Fed interest rate at their December meeting in the face of strident criticism about the pace of recent Fed interest rate hikes, conditions should have been in place for a much quieter session this time around.

After all, even with 2018's relatively aggressive pace of federal-funds-rate increases, the Fed had not raised rates at two meetings in a row. So, having raised rates at the last meeting, the Fed should be able to pass on doing so in January. It also helps that inflation, one of the underlying reasons for raising rates, has cooled off in recent months. A few months ago, the Personal Consumption Expenditure Price Index (the Fed's preferred measure of inflation) was running at a year-over-year pace of 2.4 percent. As of the most recent reading though, this is down to 1.8 percent.

Another trouble area for the Fed has eased since the December meeting. At that time one of the reasons the Fed rate hike was controversial was that the stock market was struggling. The S&P 500 would go on to lose 9.2 percent during December, and since higher interest rates create a headwind for stock prices, the Fed was a favorite target for frustrated investors. For now though, a strong start to 2019 by the US stock market has calmed some of that investor angst.

Even the Fed's most prominent critic has turned his attention elsewhere since December. President Donald Trump was very vocal about his disagreements with Fed interest rate hikes last year. Now though, the partial government shutdown has become the primary target of the President's critiques, leaving the Fed to operate a little more under the radar.

However, that same government shutdown is the one thing that could bring some unexpected spice to the upcoming Fed meeting.

What to expect from this Fed meeting

At the conclusion of every FOMC meeting, the Fed releases a brief statement announcing any policy moves and commenting on major economic conditions that might affect inflation or employment. The wording of those comments is always dissected carefully by the financial community for clues to future interest-rate trends. In particular, after meetings when the Fed has no new policy decision to announce, the wording of this post-meeting statement becomes the focus of attention.

It is close to a mortal lock that the Fed will take no action on federal funds rates at this meeting. Not only did they just raise rates in the last meeting, but they seem on track to slow the pace of rate increases in 2019.

The December meeting gained attention primarily because of the FOMC's decision to raise its interest rate target by a quarter of a percent, to a range of between 2.25 percent and 2.5 percent. What got less attention is that the FOMC also decided to lower its rate projection for 2019 to 2.9 percent. That would seem to leave just a 0.40 percent to 0.65 percent difference between the current rate range and where the FOMC expects rates to go in 2019. After a full percentage point increase in rates last year, this indicates a gentler slope to rate increases in 2019.

Absent a rate decision in the upcoming meeting, the wording of the Fed's comments should draw all the attention and it will be especially interesting to see what, if anything, the FOMC has to say about the partial government shutdown.

Though the government shutdown is temporary, the ripple effects of the financial distress caused to 800,000 furloughed workers, plus lost revenue to companies that depend on government business, could be more lasting. The upcoming FOMC meeting is an opportunity for the Fed to share with the world its level of concern about the long-term effects of the shutdown.

In the style of most FOMC announcements, wording addressing the shutdown is likely to be brief, but its impact on the financial markets and possibly the government itself could be considerable.


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