Stockholm (Ekonamik) – The U.S. Federal Reserve voted unanimously to keep interest rates in a range between 2.25% and 2.5% at its first 2019 policy meeting January 30th, pledging future moves would be made patiently and according to how economic conditions unfold.
“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,” the Fed committee’s statement read.
The Dow Jones Industrial Average surged 450 points following the announcement.
The move was a turnaround from comments made following the Fed’s December meeting that more rate hikes would be warranted, marking a more subdued approach following months in which comments from Fed Chairman Jerome Powell roiled markets and attracted presidential criticism.
The move also mirrors the decision by the ECB and the BoJ to hold its policy rates, reflecting apprehension about a wider global economic slowdown.
The Fed also issued a separate statement on its balance sheet suggesting that policymakers would consider adjusting the reduction of the bank’s bond portfolio if conditions warrant such a change. The balance sheet will, however, remain sizable once the reduction is complete, a statement that officials expect to operate with “an ample supply” suggested.
“It is appropriate at this time to provide additional information regarding plans to implement monetary policy over the long run,” the committee noted. Its balance sheet consists in the main of a mixture of Treasurys and mortgage-backed securities purchased in the effort to lower long-run rates and stimulate the economy during the financial crisis.
The Fed clarified that it was willing to reconsider its program of allowing a capped level of proceeds from securities to roll off on a monthly basis while reinvesting the rest to assuage investors over quantitative tightening, following Powell’s December comment that the program was effectively “on autopilot”.
“The Fed is prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.”
The benchmark funds rate is the Fed’s traditional key tool for policy.
The Fed also lowered its assessment of economic growth from “strong” to “solid”, noting that its inflation gauges “have moved lower in recent months.”
UPDATE (February 7): Powell’s predecessor, Janet Yellen, suggested in an interview with CNBC Wednesday that the Federal Reserve could actually wind up cutting interest rates this year if the U.S. economy continues to slow down.
“If global growth really weakens and spills over to the United States, where financial conditions tighten more and we do see a weakening in the U.S. economy, it’s certainly possible that the next move is a cut,” Yellen said.
“Both outcomes are possible,” she added, meaning the Fed could also raise rates if economic growth is strong in 2019 and the labour market continues to tighten.
Image: Wikimedia Commons
