Following the October Federal Open Market Committee meeting, the rate decision was often characterized as a 'hawkish cut'. The FOMC cut the Federal Reserve funds rate to between 1.50 and 1.75%, but Chairman Jerome Powell also made it clear that this was the last cut unless the economy materially got worse. Following the meeting, odds for rate cuts have fallen severely at the next couple of meetings.

Going forward, the Fed is in wait and see mode. It's betting that three cuts will be enough to firm the economy and is holding onto its firepower in case the economy gets worse. Despite this shift, the Fed is going to be even more dovish in 2020 than it was in 2019. This might not mean rate cuts since the economy is in much better shape with less potent tail risks due to improvements in the trade war and Brexit negotiations. Instead, it will translate into not choosing to hike rates even if the economy and inflation improve.

Change in Composition

The biggest headline change in the FOMC will be rotation among voting members. While eight voting members of the FOMC carryover ever year, four votes rotate among eight regional Fed boards. Due to this change, two of the most hawkish FOMC members - Boston Fed President Eric Rosengren and Kansas City Fed President Esther George - will be losing their votes.

One of their replacements will be Minneapolis Fed President Neel Kashkari who is the most dovish member. At the last meeting, both Rosengren and George dissented against cuts, while it's possible Kashkari would have been in favor of a 50 basis points rate cut. They have consistently warned about financial stability risks, while Kashkari has emphasized the persistent underperformance in inflation.

Election

Another reason to expect the Fed to stay on the sidelines even if the economy improves in the upcoming election. Chair Powell and the FOMC have not enjoyed President Donald Trump using his bully pulpit to influence policy. The Fed is committed to its independence and institutional credibility even above the goals of price stability and low inflation.

Being seen as tilting the playing field by raising rates in an election year is simply not going to happen. It also would count as the Fed's second "U-turn" with three rate cuts in 2019 following four hikes in 2018.

Change in Thinking

Another reason to expect the Fed to not hike under any circumstance in 2020 is the increasing acknowledgement at the FOMC that monetary policy may have been too tight over the last decade. This is due to the continued underperformance in inflation and lack of wage growth. It raises the possibility that the Fed could have deployed more ammunition without any adverse impacts.