Fed holds rates
WASHINGTON, DC – January 31, 2019
The Fed maintained the target range for its benchmark interest rate at 2.25%-2.5% on Wednesday, an anticipated pause after the Fed increased this range by 0.25% in December, its fourth increase of 2018. The Fed’s chairman, Jerome Powell, has been invoking the word "patient" to describe the Fed's latest approach to rates increases.
On Wednesday, the Fed released a new statement that clarifies some of its thinking on its current plan to reduce the size of its balance sheet. It came about after “extensive deliberations and a thorough review of experience to date.”
“The Committee continues to view changes in the target range for the federal funds rate as its primary means for adjusting the stance of monetary policy,” the statement said. Though the Fed added that it “is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial conditions.” If the economy turns south, the Fed is signaling that changes to its balance sheet plans could become a policy tool, but that right now it is not a primary part of its program.
According to Powell, the economic growth remained “solid” and the central bank expected growth to continue. But in a sharp reversal of the Fed’s stance just six week ago, Mr. Powell said the Fed had “the luxury of patience” in deciding whether to raise rates again.
“The case for raising rates has weakened somewhat,” Mr. Powell said, pointing to sluggish inflation, slowing growth in Europe and China, and the possibility of another federal government shutdown.
Mr. Powell did not directly address how long the Fed planned to remain patient but suggested any future rate increases would depend largely on signs of inflation, which has consistently fallen below the Fed’s 2% target.
“I would want to see a need for further rate increases, and for me a big part of that would be inflation,” he said.
Brian Coulton, chief economist at Fitch Ratings, said he expected economic growth to continue and therefore he expected the Fed to resume rate increases this year. “This reads more like a pause than a strong signal that they believe that they are the end of the hiking cycle,” Mr. Coultonsaid. “Barring a very significant global downturn, we still see further rate increases later this year.”
Others, however, said the Fed may well have raised rates for the last time during the current economic expansion. Managing Director and Chief Global Strategist Mark Grant, noted that the Fed, for the first time since 2015, removed the phrase “gradual rate hike” from its release, as quoted by MarketWatch. Grant believes that this year there may be no more rate hikes. The Fed came to this either by listening to President Trump or by its own agreement. With the economy poised to slow over the next year, the Fed is not interested in risking turning that slowdown into a recession.
Trump repeatedly criticized the Fed because of its policy of rate increases last year. In December, when the last decision was made to raise rates, the Fed laid several increases in 2019.
Fed Chairman Powell explained at a press conference that the regulator decided to reconsider its position due to a negative market reaction and lower inflationary pressure.
Last month, the key rate was raised by 0.25 percentage points.