In a not surprising fashion, the Federal Reserve held interest rates unchanged with the federal funds rate at 1.5% to 1.75% and adjusted its post-meeting statement to reflect what appears to be a stronger commitment to push up inflation. The decision was unanimous.
Federal Reserve Chairman Jerome Powell quoted, “We believe the current stance of monetary policy is appropriate to support sustained economic growth, a strong labor market and inflation returning to our symmetric 2% objective,” Fed Chair Jerome Powell said at a news conference following the central bank’s unanimous decision to maintain the key overnight lending rate in a range of between 1.50% and 1.75%.
Meeting market expectations, the FOMC said Wednesday it will hold its benchmark funds rate, a range where it has been since the latter part of last year. Officials hope they can allure inflation higher by committing to keeping rates low until the inflation level rises. They even indicated, through the “symmetric” terminology, that they will allow inflation to run above target for some time.
Fed Powell also noted signs that global economic growth was stabilizing and diminishing uncertainties around trade policy, concern about both of which were major factors in the Fed’s decisions to cut rates three times last year.
After indicating a list of positive developments, including the initial trade agreement reached recently by the United States and China and some suggestion in global manufacturing hitting a possible bottom, Powell noted China’s economy would see at least a short-term hit from the coronavirus outbreak.
On another note, there was not much in regards to comments in their statement. There were few changes in the statement, outside of the change of date and rotating members, there were changes to the wording of the statement comparative to December: the dampening of household spending was characterized as rising at a “moderate” pace (downgraded from “strong”) and inflation was seen as “returning to” target (instead of “near”).None of this really teetered the scales in a meaningful way, and the decision to extend overnight and term repos will more than likely be received positively by financial markets.
With Federal Reserve officials likely to hold interest rates steady, the focus of their meeting today shifts to modifying their control of short-term rates. The Fed’s statement did not announce any immediate changes to the central bank’s current exercise of buying $60 billion monthly of U.S. Treasury bills to ensure adequate short-term liquidity in bank funding markets.
The overnight and term repo market shook the financial world in September when an unexpected rate spike upset short-term lending, prompting the Federal Reserve to intervene. The Federal Reserve successfully flooded markets with cash in the fourth quarter of last year to avoid a spike in overnight lending rates and ensure the central bank keeps control of the federal funds rate.
Powell said the Fed would likely begin scaling back that amount sometime in April-June 2020, when the amount of reserves in the banking system would likely be deemed suitable. After that, purchases would be made and the Fed’s balance sheet expanded as necessary to ensure the level of bank reserves remained “ample,” he said.
The Fed’s big problem now is figuring out when and how to wind down the program. The undertaking could be more complicated if some market participants are right that the moves have stimulated a stock market bull rally.
Yields on U.S. Treasury securities crushed lower as Powell spoke, while benchmark U.S. stock market indexes gave up all of their gains on the day.
In my opinion, the Fed is going to push it all in, as they would say in poker. I will remind people that there are 3 types of reasons people make decisions… One because of greed, two because of fear, and three because of need, so there is really no other decision but they need to do it. The Fed is in a box, what would anyone want them to do? Give up and say “well we did all we could do, good luck.”
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