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On Hold

20 February 2020 by jbchevrel

We got the minutes from (A) the ECB today and (B) the Fed’s yesterday. (A) The ECB minutes acknowledged the “phase-one” deal. GC members welcomed a slight pick-up in PMIs, especially manufacturing, although coming from very low levels. As often, the GC agreed to wait and see more data. Although that is usually not followed by any action, the GC was reportedly concerned by financial stability risks due to the current monetary stance. They noted that “potential side effects might become more pronounced in an environment with low rates and a flat yield curve persisting for a long time” and also on the equity markets, where “the continued rise in valuations was difficult to square with a weaker earnings outlook”. A remark was also made that higher house prices could create financial risks and local macro prudential tools might be insufficient to tackle them. (B) The FOMC minutes did not show either any particular lean with respect to policy direction or timing for future changes. FOMC agree that maintaining the current stance allows "for a fuller assessment of the ongoing effects on economic activity of last year's shift to a more accommodative policy stance and would also allow policymakers to accumulate further information bearing on the economic outlook." Basically, ‘wait and see’, as well. The minutes noted the pickup in residential investment, a trend that started in summer 2019. The FOMC discussed how maintaining the current stance for a time could support the US economy "in the face of global developments that have been weighing on spending decisions." The ongoing review of tools and communication practices was discussed. The FOMC members hope to complete this around summer. In January, the discussion focused on interactions with financial stability and the potential use of inflation ranges around the 2% target. On the former, the minutes show that several policymakers do not wish to "rule out the possibility of adjusting the stance of monetary policy to mitigate financial stability risks." There is 1.5x cut priced in for the Fed this year, and close to nothing for the ECB. Kashkari, dove voter, recently said he would expect 3-6m on hold and then another -25bp cut. While he is on the dovish end of the spectrum, the OIS market’s view is close to his’.