Steady Fed Policy – January 2020 Edition

While there was a wide range of important economic news this week, there were no significant surprises. The major economic growth and inflation data came in right on target, and Wednesday’s Fed meeting was in line with expectations. Since it’s still too early to judge the extent of the effects of the coronavirus, a small shift to safer assets helped mortgage rates end near the lowest levels since 2016.

Investors were closely watching the news about the spread of the dangerous new coronavirus this week. For mortgage rates, the main question is how much global economic growth will slow due to decreased travel and other activities. There still is far too much uncertainty to forecast the outcome with a high degree of accuracy, however, so investors generally have continued to reduce the level of risk in their portfolios.

Gross domestic product (GDP), the broadest measure of economic activity, increased 2.1% during the fourth quarter, which was the same growth rate as the third quarter. Early estimates for the first quarter of this year are a little lower, partly due to an expected slowdown from the coronavirus.

The PCE price index, the inflation indicator favored by the Fed, revealed that core inflation was 1.6% higher than a year ago, which was the same annual rate of increase as last month.

As widely expected, the Fed held the federal funds rate steady and its statement released after the meeting was very similar to the prior one. In short, the message still is that Fed policy is unlikely to change any time soon, barring any major new developments to shift the economic outlook. When asked about the coronavirus, Fed Chair Powell reassured investors that officials are closely monitoring the situation but that it is too soon to forecast its ultimate economic impact.

Looking ahead, the monthly Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the ISM national manufacturing index will be released on Monday. The ISM national services index also will come out on Friday. In addition, news about the coronavirus, the US elections, or the trade negotiations with China could have an influence.

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