US Fed holds rate, household spend now only moderate

January 29, 2020

By CentralBankNews.info

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:

“Information received since the Federal Open Market Committee met in December indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a moderate pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; 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. The Committee decided to maintain the target range for the federal funds rate at 1‑1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.
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 monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.”
“Decisions Regarding Monetary Policy Implementation
The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on January 29, 2020:
  • The Board of Governors of the Federal Reserve System voted unanimously to set the interest rate paid on required and excess reserve balances at 1.60 percent, effective January 30, 2020. Setting the interest rate paid on required and excess reserve balances 10 basis points above the bottom of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the FOMC’s target range.
  • As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:
    “Effective January 30, 2020, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/2 to 1-3/4 percent. In light of recent and expected increases in the Federal Reserve’s non-reserve liabilities, the Committee directs the Desk to continue purchasing Treasury bills at least into the second quarter of 2020 to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations at least through April 2020 to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.50 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
    The Committee directs the Desk to continue rolling over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable.
    The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”
  • In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 2.25 percent.
This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve’s operational tools and approach used to implement monetary policy.
More information regarding open market operations and reinvestments may be found on the Federal Reserve Bank of New York’s website.”