The Federal Reserve could launch the printing press again in 2020.
The Fed Chairman Jerome Powell started to get the global financial market for a softer monetary policy by the US regulator as early as in December 2018. That was a period of unprecedented pressure on the regulator from politicians and the private sector. He decided to stop the tightening cycle which took more than 15 months and expressed readiness to wait and see, pointing to a need of a pause. There were rumours and talks in the market that the Fed is going not only to stop hiking but also is getting ready to cut the interest rates in order to tackle the potential economic slowdown in the United States.
However, most of the analysts agree that such a softer scenario is possible in 2020 but not this year and there are several reasons for that. First, the quantitative easing programme would reflect the general trend of softer and more stimulative monetary policy by other world’s major central banks. Concerns about the global economic growth are getting higher in the light of the European Union very close to a recession and the Chinese economic growth is at the slowest in more than 10 years. Several fixed-income market traders started to shift the focus to 3- and 4-year Treasuries and bonds, as well as mortgage securities for the 10-year term because of possible growth of real interest rates compared to nominal.
Another problem is that the Federal Reserve does not have traditional tools to tackle a possible recession. The range of the interest rates remains around 2.25-2.5% and the inflation target is 2% per year. The room for manoeuvre is not so large like, for example, Alan Greenspan had when he slashed the interest rates, leading the game against bubbles in the market. Moreover, the Fed is the only major central bank still considering rate hikes and tighter monetary policy. ECB already came back to the quantitative easing, the Bank of England is on holds, the Bank of Canada is considering rate cuts. The same picture is seen in Australia, New Zealand and Japan, while the Chinese government had already announced a huge tax cut programme despite the largest level of the government debt to the gross domestic product ratio. So, any further sign of a slowdown in the United States would force the Fed officials to buy bonds and Treasuries faster than it was previously anticipated.