Macroeconomic & Geopolitical

Central Banks on Hold, USMCA in the Fold

December 2019 – 3 min read
FOMC and ECB meetings both signal a holds on rate changes and the USMCA likely to pass at the beginning of 2020.


FOMC Meeting: As expected, the FOMC voted unanimously during its December meeting to keep the fed funds rate steady at a range of 1.5%–1.75%. After three 25 bps cuts this year, the Fed is signaling it will remain on hold over the year ahead. The median dot for December shows the fed funds target rate remaining at current levels in 2020 and rising slowly in 2021 and 2022. The longer run median projection remained unchanged compared with September at 2.5%. The Fed’s outlook was relatively unchanged, and they believe current monetary policy supports sustained expansion. Separately, Fed Chairman Jerome Powell addressed the recent issues in the repo market—noting that the Fed could purchase Treasury coupons if appropriate.

ECB Meeting: The European Central Bank kept its main policy rates unchanged during its December meeting, as expected. This follows the eventful September meeting in which they reduced the deposit rate to -0.5%, introduced a new round of QE, and eased TLTRO conditions. This was the first meeting and press conference with Christine Lagarde as president, and all eyes were on how she communicated and any messaging surrounding the strategic review. Lagarde noted that she is neither a dove nor a hawk, but an owl. She said that her style of communication will be different than previous presidents, and warned against over-interpreting her message. In terms of the strategic review, she plans to begin in January and be completed by the end of 2020. Since it has been 16 years since the last review, this one will be comprehensive and touch on aspects such as climate change and rising inequality. In terms of the ECB’s outlook, they signaled that they will keep interest rates at current levels until inflation converges sufficiently close to, but below, the 2% target. At the press conference, Lagarde noted that there are signs of stabilization in the euro-area economies, but risks are tilted to the downside.

Trade: The U.S. and China have reached an agreement on a “Phase One” deal ahead of the December 15th tariffs⁠—which are now delayed. Separately, the House and White House reached an agreement on the USMCA after a year of negotiations. The major changes came in the form of enforcement mechanisms and monitors for labor and environmental standards in the new deal, removal of protections for drug companies, and strengthening the process for dispute settlements. However, the Senate will not vote on USMCA until after the impeachment trial in 2020.

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Christopher Smart, PhD, CFA

Chief Global Strategist & Head of the Barings Investment Institute

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