US Fed holds rate and will be patient in further tightening

January 30, 2019

By CentralBankNews.info
    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.

     But instead of its past reference to the need for further increases in the fed funds rate to maintain the economic expansion and inflation near its objective, the FOMC today merely said it viewed a “sustained expansion of economic activity, strong labour market conditions and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes.”

     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:

“Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Although market-based measures of inflation compensation have moved lower in recent months, survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.”

     The Fed also released the following statement about monetary policy implementation and balance sheet normalization:
“After extensive deliberations and thorough review of experience to date, the Committee judges that it is appropriate at this time to provide additional information regarding its plans to implement monetary policy over the longer run. Additionally, the Committee is revising its earlier guidance regarding the conditions under which it could adjust the details of its balance sheet normalization program. Accordingly, all participants agreed to the following:
  • The Committee intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve’s administered rates, and in which active management of the supply of reserves is not required.
  • The Committee continues to view changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy. The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.”