Today the Federal Reserve Board decided to leave the Federal Funds Rate unchanged. More importantly, they also said that "In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes."
After the December meeting (when the Fed raised rates by 0.25%), we shared that we thought Powell's (and the Federal Reserve Board's) position on future rate increases was beginning to change. We referenced Powell's statement in November that rates were nearing "neutral" territory. We also highlighted that in the December meeting the Fed reduced the expected number of rate hikes in 2019 from three to two because it would take any pressure of needing to raise rates in early 2019 away. We believe the Fed's actions today are consistent with their position over the last few months. Powell did not come out and directly state that there will be less than two rate hikes this year, however, his statement suggests that there MAY NOT be two rate hikes this year, and towards the middle of the year, if the Fed's comments continue in the direction they are on, it will be no surprise when they do make that announcement.
We also wanted to reiterate that while the Fed is seeing less need to continue increasing interest rates, the data they have gathered indicates that the U.S. economy continues to be strong, saying "Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year."
We believe much (if not most) of the moderation in the growth of business fixed investment stems from the trade dispute with China. Businesses like to have stable, long-term projections in place before engaging in long-term investments, like building factories or warehouses. This is important, because the outcome of the current trade dispute leaves so much uncertainty, that we would expect most corporations to slow down their rate of capital expenditures pending a resolution. Essentially, corporations are keeping their cash on hand should an "opportunity" arise.
If China and the U.S. are able to come to a resolution this year, we believe the rate of capital expenditures could increase very quickly. After a trade agreement, new analysis would be done showing that costs remain in check. Additionally, we would expect consumer sentiment to increase, which should ultimately lead to increasing revenues (and profitability), which would provide the stable, long-term backdrop most corporations would want to see before making large capital investments. The result of a strong increase in capital expenditures would be renewed global economic growth.