The U.S. Federal Reserve kept its benchmark target for the federal funds steady at 1.50 – 1.75 percent for the second time but turned slightly dovish by describing house holding spending as rising “at a moderate pace” instead of “a strong pace,” as in December.
The Fed’s policy-making body, the Federal Open Market Committee (FOMC), reiterated its description of business fixed investments and exports as still weak and inflation continuing to run below the 2.0 percent target.
Countering that weakness the FOMC said the labor market remains strong and economic activity has been rising at a moderate rate.
As in December, the FOMC was unanimous in its decision.
Early last year the Fed carried out a sharp U-turn when it reacted to weakness in the global economy and then cut the fed funds rate three times by a total of 75 basis points, ending in October.
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In December the Fed then kept its rate steady and signaled it would keep rates on hold for a while, and it would take a “persistent” and “significant” rise in inflation before it considers any rate hike.
The Fed today reiterated it considers the current policy stance as “appropriate” to support sustained expansion of economic activity and strong labor market conditions and “inflation returning the Committee’s symmetric 2 percent objective.”
Today’s reference to getting inflation to return to 2 percent is slightly different to its December statement when it said the current policy stance was appropriate to support inflation “near” the 2 percent objective.
This reflects the recent uptick in headline inflation to 2.3 percent in December and 2.1 percent in November due to higher energy costs.
As in December, the FOM said it would continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures.
In December the trimmed its forecast for the fed funds rate this year to average 1.6 percent from an earlier 1.9 percent, rising to 1.9 percent in 2021 and 2.1 percent in 2022.
In a separate statement on the implementation of its monetary policy, the FOMC raised its interest rate on excess reserves by 5 basis points to 1.60 percent, or 10 points above the bottom of its target range for fed funds, “to foster trading in the federal funds market at rates well within the FOMC’s target range.”
The Fed also said it term and overnight repo operations, which it began in October following a spike in money market rates, would continue “at least through April” to ensure the supply of reserves remains ample and mitigate the risk that pressures in money markets affect policy implementation.
The Fed said it would be conducting overnight reverse repurchase operations, and reverse repo operations with maturities of more than one day, at a rate of 1.50 percent in amounts only limited by the value of Treasury securities available for such operations and by a per-counterparty limit of $30 billion per day.”
It added that principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in mortgage-backed securities and it would continue to roll over all principal payments from its holdings of Treasury securities.
The Board of Governors of the Federal Reserve System released the following statement, followed by a another statement about the implementation of monetary policy: