US Fed keeps rates on hold, sees long pause

The US Fed held its benchmark interest rate steady and signalled no appetite to raise it anytime soon.

US Federal Reserve Bank Chairman Jerome Powell talks to journalists after the central bank left rates on hold. Picture: AFP

The Federal Reserve held its benchmark interest rate steady and signaled no appetite to raise it anytime soon.

After lowering rates at their three previous meetings to guard the US economy from the effects of trade tensions and a global slowdown, Fed officials indicated comfort with leaving policy on hold through next year while keeping an eye on those risks. Their benchmark rate is in a range between 1.5 per cent and 1.75 per cent.

Officials in their policy statement continued to express an upbeat view of the economy. “The committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity,” strong hiring conditions and stable prices, the statement said. In a sign of slightly more confidence in this position, they dropped from their statement a phrase that in October had said “uncertainties about this outlook remain.”

The statement continued to highlight muted inflation pressures and global developments as risks worth monitoring and contained few additional changes.

“Our economic outlook remains a favourable one,” Fed Chairman Jerome Powell said at a news conference.

Fed chief Jerome Powell speaks to journalists. Picture: AFP

Fed officials’ new projections showed most officials believe rates are low enough to stimulate growth. They expect that if their economic outlook holds, they can keep rates steady through 2020. In this scenario, most see the Fed raising rates once or twice afterwards to return them closer to levels that neither spur nor slow growth.

Officials signaled in public comments in recent weeks, however, they saw risks of slower-than-forecasted growth in the near term, meaning that they are still more inclined to lower rates than to raise them for now.

The new projections provided more evidence of officials’ reassessment of the economy after the failure of inflation to accelerate as they have long predicted.

For example, officials have been lowering their projection of the level at which the unemployment rate is consistent with stable prices over the long run. On Wednesday, most projected this rate at between 3.9 per cent and 4.3 per cent, down from between 4.4 per cent and 4.7 per cent two years ago. Such revisions suggest officials see greater scope for unemployment to hold at historically low levels without fuelling more inflation.

Fed officials lifted interest rates four times in 2018 and a year ago expected to continue raising them this year because they anticipated strong economic momentum, including very low unemployment, would push inflation higher.

Mr Powell and his colleagues scrapped those plans early in 2019 when it became clear prices weren’t rising as expected. Stocks had tumbled and corporate bond issuance dropped late last year, amid signs of a global growth swoon and investors’ concern that higher interest rates could trigger recession.

That kicked off an introspective examination of the Fed’s guiding framework. Central to the Fed’s thinking is how it perceives progress in achieving its twin goals of maximum employment and inflation near 2 per cent. The jobless rate has declined to 3.5 per cent in November from 10 per cent in 2009, but the Fed’s preferred measures of inflation have reached the central bank’s 2 per cent goal for only a few months last year.

Excluding volatile food and energy categories, inflation slipped to 1.6 per cent in February from 2 per cent in December 2018, using the central bank’s preferred gauge, and inflation has held near that lower level ever since. A separate inflation measure produced by the Labor Department and released on Wednesday showed annual price gains were near their highest levels recorded this decade.

Officials began weighing rate cuts in June and reduced their benchmark rate in July when trade uncertainty damaged the growth outlook, fanned fears on Wall Street of recession and raised worries of a more persistent shortfall in inflation.

Fed rate cuts in July, September and October marked an especially intense period for monetary policy and divided the 17 officials who participate in policy deliberations. Some wanted to wait for more evidence that a global manufacturing downturn was infecting the broader US economy, which has been buoyed by solid consumer spending.

Others feared that because they had less room to cut interest rates if the economy weakened, they should act sooner than in past periods. Also, data revisions this year suggested the economy wasn’t as strong as officials had thought last year when they were raising rates, Mr Powell said last month.

Data released since the Fed’s October meeting has been mixed. While manufacturing and other gauges of business activity have shown little upturn, the Labor Department last month reported hiring had firmed up in recent months, with employers adding, on average, more than 200,000 jobs a month for the three months ended November.

The Fed’s rate-setting committee voted 10-0 on Wednesday’s action, the first time since May with a unanimous outcome.

The Fed has also made a major U-turn this year on its $US4 trillion asset portfolio. Officials stopped shrinking their holdings in July and later concluded that a spike in money-market rates in mid-September was evidence they had allowed bank deposits held at the Fed, called reserves, to fall too low.

To add reserves back into the banking system, the Fed began buying $60 billion in short-term Treasury bills in October. They have also scaled up daily and weekly lending operations to flood the financial system with liquidity ahead of another anticipated cash crunch at the end of the year.

Some big banks could have incentives to scale back lending in money markets to slim down their balance sheets and avoid potential higher capital charges. Meantime, rising budget deficits have left bond dealers with more government bonds to sell and less spare capacity, as a result, to lend in money markets.

Dow Jones Newswires