Fed Keeps Rates Unchanged and Expresses Patience With Current Policy Stance
As expected, the FOMC left rates unchanged today and said they are willing to be patient with the current state of policy. This implies they will most likely pause rate hikes for the foreseeable future. While the rate decision was a foregone conclusion, the real drama in today’s decision was how much dovishness they would display in the statement and the post-meeting press conference. While we await the Powell presser, the statement toned down the enthusiasm for the economy and ongoing rate hikes from the December statement which helped provoke some of the end-of-year stock selling. The more cautious economic outlook is a logical outcome given the gathering signs of a global slowdown, the aforementioned market volatility, and the ongoing political dysfunction as evidenced by the government shutdown. With inflation pressures calm, the Fed can afford a more patient approach and let the previous nine rate hikes continue to work their way through the economy. The other question heading into today’s meeting was whether the Fed would adjust the auto-pilot-like approach to balance sheet run-off that was also blamed for some of the year-end volatility. In a separate statement the Fed stressed the program would be adjusted to ensure “an ample supply of reserves that ensures control over the federal funds rate. ” They also said the program could be altered “in light of economic and financial developments.” While we think the balance sheet run-off/market volatility linkage is tenuous at best, we suspect Chair Powell will repeat today’s statement that the program is subject to adjustment given market conditions and the need for adequate reserves.
The Treasury market was a few ticks lower in price before the decision but following the statement yields are moving gently lower on the short-end as the Fed was viewed as sufficiently dovish. The 2-year note is currently yielding 2.54%, within shouting distance of the 2.50% fed funds rate. The 10-year note is currently yielding 2.71%, so the 2yr-10yr spread of 17bps remains in the 10-20bps range that has prevailed over the last two months as the flattening trend pauses, along with the Fed. The full text of the statement follows:
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.
Thomas R. Fitzgerald
Director, Strategy & Research
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