Amid growing economic pressure, inflation and a formal policy shift, the US Federal Reserve has kept interest rates stable in what is the best sign yet that the tightening cycle it activated in 2015 may be over.
The fed again lessened its grip, saying it was ready to adapt its plans based on economic and financial developments, and go with a more diplomatic stance while shedding its assets.
There’s a lot of uncertainty swirling about the US economic outlook, Fed Chairman Jerome Powell said the case for raising rates had ‘weakened’. The US central bank has lowered its previous forecast in favour of further tightening, Mr Powell said in a statement.
Following the Fed’s latest two-day policy meeting, Powell told reporters that the central bank would likely stop shaving back its $US4.1 trillion balance sheet sooner, leaving it with more assets than was predicted.
On the prospect of rate hikes, Powell said:
‘The situation now calls for patience…
‘I think it’s the right thing. I feel strongly that it is.’
Fed seeks more flexibility
According to RAW, the balance sheet announcement and the shift on rate hikes was meant to give more flexibility from the central bank. Which has been plagued by financial market volatility, signs of global economic slowdown and a partial US government shutdown that looms over the economy.
‘This marks a full 180 from what the Fed was signalling just a few months ago,’ said Mohamed El-Erian, chief economic adviser at Allianz, in Newport Beach, California.
After the Fed statement US stocks went up 1.5% in the S&P 500 index. However the US dollar and short-term yields dropped, as investors’ realised additional rate hikes weren’t lowering any time soon.
Market expectations of future rates continued to fall. And contracts connected to the Fed’s policy rate hovered at a one-in-four chance of a hike in 2019, while 2020 contracts were showing a chance of rate cuts, as reported by RAW.
According to the Fed’s policy statement, its overnight benchmark lending rate has a target range of 2.25% to 2.50%, RAW reports.
Economic outlook clouded
The US central bank claimed continued economic and job growth was still ‘the most likely’ outcome, but decided to omit that language in its December policy statement, instead saying that the risks to the outlook were ‘roughly balanced’.
Last year, the Fed raised rates four times. During one these rate hikes in December, it also announced it would raise twice more in 2019.
Yet economic forecasts are becoming increasingly cloudy, as recent volatility in financial markets and signs of slowing growth overseas becomes apparent.
There’s added fears that the 35-day partial shutdown of the US government may curb consumer spending, according to RAW.
‘In light of global economic and financial developments and muted inflation pressures, the committee will be patient’ the Fed’s rate-setting committee said in the policy statement about regulating future rate hike.
No changes were made by the fed to the US$50 billion maximum monthly runoff of treasury bonds, nor the mortgage-backed securities from its balance sheet.
In another statement, the Fed said it would continue managing policy with a system of ‘ample’ reserves, supporting the idea of a rundown ending sooner than expected, as reported by RAW.
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