The Federal Open Market Committee (FOMC) unanimously voted to leave the fed funds target range unchanged in January in a range of 1.50%-1.75%. In the policy statement, the Fed revised their description of household spending as “moderate” vs.  “strong”. Otherwise, there were no significant changes to the statement and Fed Chair Powell continued to signal that monetary policy is likely to remain on hold. Powell’s press conference was viewed as somewhat dovish, but the Fed remains cautiously optimistic about the overall economic outlook. Powell said the Fed would likely begin scaling back its current practice of buying $60 billion per month in US Treasury bills sometime in the April-June time frame. After that, the Fed’s balance sheet is expected to grow as necessary to maintain an ample level of bank reserves in the system. Although we believe the hurdle rate for the FOMC to make any changes to US monetary policy over the near-term is very high, we believe policymakers would consider providing additional policy accommodation if needed.

Although we believe the economy continues to grow at a moderate pace, fears about the coronavirus and its potential impact on global economic growth, an uncertain future path of global central bank policy, lingering uncertainty about trade policy, and the upcoming US presidential election potentially sets the stage for a continued volatile financial market environment this year. A solid labor market and healthy consumer fundamentals continue to drive the economy, while the manufacturing sector remains under pressure.

The Treasury yield curve reverted to an inversion in January. At month-end the yield on 2-year and 5-year Treasuries was roughly 20 basis points below the yield on 3-month T-bills. The yield on 10-year Treasuries declined 41 basis points in January to 1.51%, slightly below the yield on 3-month T-bills at month-end. We believe the flattening of the Treasury yield curve has largely been driven by fears about the coronavirus and its potential impact on global economic growth and inflation expectations.