Highlights:

  • As expected, the target range for the fed funds rate was held steady at 2.25-2.50% in a unanimous decision. The current rate is at the lower end of the range of estimates of the longer-run neutral policy rate.
  • Their tightening bias was replaced with language that emphasizes a “patient” approach to future policy adjustments—consistent with recent messaging from a number of committee members.
  • The statement no longer characterized risks to the economic outlook as “roughly balanced,” but a sustained expansion remains the Fed’s base case.
  • In a separate statement on monetary policy implementation, the committee said they’re prepared to adjust the details for completing balance sheet normalization in light of “economic and financial developments.” That should help assuage some investors’ fears that balance sheet normalization is on autopilot. Powell also confirmed that the FOMC will continue with their current rate-setting framework indefinitely, meaning an “ample supply of reserves” will be needed.

Our Take:

The FOMC left rates unchanged today and made some dovish changes to their policy statement that left it more in line with recent messaging from a number of committee members. Most notably, reference to “some further gradual” rate hikes was dropped. Instead, the Fed will be “patient” in determining whether further policy adjustments are warranted. That shift was motivated by global economic and financial market developments and muted inflation pressures. Chairman Powell elaborated on some of those “cross currents” in his press conference, noting further signs of slowing global growth (particularly in Europe and China), persistent uncertainty over trade policy, some sustained tightening in financial conditions (despite recent improvement), and a government shutdown that will impact Q1 growth (and hasn’t been fully resolved at this point). He also indicated that inflation trends and financial stability risks don’t point to a pressing need for tighter monetary policy. Summing things up, Powell noted the case for raising rates has weakened. The overall message was even more dovish than markets expected, sending Treasury yields lower (particularly at the front end) and boosting equities.

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While “cross currents” suggest risk of a less favourable outlook, the Fed still sees sustained economic expansion, strong labour markets, and near-2% inflation as “the most likely outcomes.” We agree with that assessment, and our central expectation is that the Fed will raise rates twice this year with the next hike coming in June. But with the committee no longer holding an explicit tightening bias, the bar for a near-term move has been raised. Unless some of the risks clouding the economic outlook are resolved in short order, or inflation starts to pick up more significantly, we might not see any moves from the Fed until later this year.

 

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