Federal Reserve Keeps Interest Rates Steady, Sees Long Pause--Update
12 December 2019 - 7:45AM
Dow Jones News
By Nick Timiraos
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 U.S. economy from the effects of trade tensions and a global
slowdown, Fed officials on Wednesday 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% and
1.75%.
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 favorable one," Fed Chairman
Jerome Powell said at a news conference on Wednesday.
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
afterward 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% and 4.3%, down from between 4.4% and 4.7% two years
ago. Such revisions suggest officials see greater scope for
unemployment to hold at historically low levels without fueling
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%. The jobless rate has declined to
3.5% in November from 10% in 2009, but the Fed's preferred measures
of inflation have reached the central bank's 2% goal for only a few
months last year.
Excluding volatile food and energy categories, inflation slipped
to 1.6% in February from 2% 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 U.S. 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 $4
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.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
December 11, 2019 15:30 ET (20:30 GMT)
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