Week In Review 2.1.2019

Equity markets ended the week higher thanks in large part to an unexpectedly more dovish stance from the U.S. Federal Reserve.
As expected, the Fed left rates unchanged following its January meeting on Wednesday. What was not expected, however, was the Fed’s more dovish tone in its accompanying statement, as well as Fed Chair Powell’s comments at his press conference. A further surprise was the release of a separate statement focused entirely on the Fed’s current balance sheet reduction plan.

In its post-meeting statement, the Fed struck a more dovish tone by stating that the “Committee will be patient as it determines” future rate increases. That stood in contrast to the December statement indicating the need for “further gradual increases” to the Fed Funds rate.

Speaking at his press conference following the meeting, Fed Chair Powell stated that “The case for raising rates has weakened somewhat.” He also indicated that he would want to see inflation move higher before raising rates again. Taken at face value, that suggests an extended pause on further rate hikes, given the lack of sustained upward pressures on inflation.

The Fed’s unexpected statement regarding its balance sheet normalization plan stressed that the primary, and preferred, means for controlling short-term rates is through changes to the Fed fund rate. However, the Fed would consider altering its balance sheet normalization plans if warranted by economic or financial developments. That marked a rather significant change in tone from prior suggestions that the balance sheet normalization plan was on “auto-pilot.”

Through Friday, 46% of companies within the S&P 500 had reported fourth-quarter earnings. Thus far 70% have beaten their consensus estimates.