The U.S. Federal Reserve left its benchmark federal funds rate steady at 2.25 – 2.50 percent, as widely expected, and confirmed its shift toward patience in raising rates and tightening monetary policy further by reducing its holdings of bonds “in light of global economic and financial developments and muted inflation pressure.”
As a clear sign of the Fed’s concern over the dampening impact on the U.S. economy from slowing global growth, the Federal Open Market Committee (FOMC), the Fed’s policy-making arm, said it was prepared to adjust the pace of the normalization of its balance sheet and use this “if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.”
Underlining this marked shift to a more dovish stance, which was first signaled by Fed Chairman Jerome Powell on Jan. 4, the FOMC also dropped its previous reference to the need for further gradual increases in the federal funds rate.
In December, when the Fed raised its rate for the 9th time since December 2015, the Fed cut its forecast for rate hikes this year to two from an earlier forecast of three as it said it was now taking into account financial and international developments, a reference to the stock market sell-off in December and the weakening pace of global growth.
In today’s statement, which was unanimously adopted by the FOMC’s 10 members, the Fed reiterated its view from December that the labour market had continued to strengthen, that economic activity has been rising at a solid rate, job gains have been strong, household spending has continued to grow strongly while the growth of business investment has moderated.
In a slight change to its comment on inflation, the FOMC added today that “measures of inflation compensation have moved lower in recent months” but reiterated that overall and core inflation remain near 2 percent and measures of longer-term inflation expectations were little changed.
In a separate statement, the FOMC also confirmed its longer-run goals and monetary policy strategy, which includes the target of 2.0 percent inflation, as measured by the annual change in personal consumption expenditures, and its commitment to living up to its mandate from the U.S. Congress of “promoting maximum employment, stable prices and moderate long-term interest rates.”
In the statement, which was originally adopted in 2012, the FOMC also referred to its estimate of the longer-run unemployment rate, which in its most recent projections was 4.4 percent.
Headline inflation in the U.S. dropped to 1.9 percent in December from 2.2 percent in November while growth in the third quarter eased to 3.4 percent from the second quarter.
The U.S. dollar weakened around 0.6 percent in the wake of the Fed’s policy shift to trade at 1.148 to the euro.
The Board of Governors of the Federal Reserve System released the following statement: