As broadly expected, the Federal Open Market Committee (FOMC) unanimously decided to maintain the target range for the federal funds rate at 2.25-2.5%. Balance sheet runoff was left unchanged as well. The first FOMC meeting of this year saw four new Committee members replacing Fed colleagues.

According to FOMC officials, domestic economic activity has been “rising at a solid rate”. However, rather than the economy evolving in a way to require further rate hikes, recent developments necessitate a more supportive stance of monetary policy in order to ensure twin objectives of price stability and full employment. In addition, the Committee no longer views the risks to the outlook as being roughly balanced. Instead, citing “recent global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines the future adjustments to the target range”.

Given a large amount of balance sheet related financial market chatter in the lead up to today’s decision, the FOMC felt it necessary to issue a statement on its longer terms plans concerning balance sheet normalization. The statement reaffirms the FOMC’s commitment to an “ample supply of reserves” in order to control the level of the fed funds rate, while also stating its intent to keep the fed funds rate as its primary policy tool. That said, the statement also reiterates that the FOMC is prepared to adjust the details of its balance sheet normalization program “in light of economic and financial developments”. This involves the Committee using all tools at its disposable to ensure it continues to achieve its dual mandate in the future, including changes to the size and composition of its balance sheet.

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Key Implications

As widely anticipated, the FOMC announced no change to the fed funds rate. This comes after weeks of Fed officials talking about the need for patience before the next rate hike, consequently driving market-implied odds of a rate hike in 2019 down nearly to zero. The decision to issue a statement on balance sheet normalization should help to quell financial market speculation that balance sheet runoff may soon come to a stop. The statement itself sends a clear message that the FOMC has access to, and will use, all the tools necessary to ensure a smooth balance sheet normalization, full stop.

The Fed is correct in waiting to evaluate domestic and global economic conditions before raising interest rates again. In addition to muted inflation pressures, a number of pressing event risks on tap for the first quarter of this year are yet to be resolved, including the partial government shutdown, a potential escalation in trade tensions with China, and Brexit. Moreover, concerns about slowing global economic activity, particularly the downdraft emanating from China, have weighed on global sentiment indexes and rattled financial markets in recent months. Given this elevated level of uncertainty globally, it may take until June before the Fed receives enough clarity on the evolution of economic and event risks in order to make an adequate assessment on whether it’s the appropriate time to raise rates again.

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