FOMC Holds Interest Rates, Reiterates Patience

by Ike Obudulu Last updated on June 19th, 2019,

Washington: Federal Reserve officials left their main interest rate unchanged and continued to pledge patience as they grappled with conflicting currents in the U.S. economy.

Central bankers, who’ve been slammed by President Donald Trump for not doing more to support the economy, took note of livelier growth while acknowledging weak inflation.

The committee repeated language from its previous meeting, saying it “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,’’ according to a statement Wednesday following a two-day gathering in Washington.

Policy makers gave no clear signal that their next move would be a hike or a cut, or that any adjustment should be expected at their next meeting in June. The unanimous 10-0 decision left the target range for the benchmark federal funds rate at 2.25 percent to 2.5 percent.

Chairman Jerome Powell will hold a press conference at 2:30 p.m. Reporters are likely to prod him over whether upside and downside risks remain truly balanced in the eyes of policy makers.

Officials also adjusted one of the tools they use to keep the fed funds rate within its target range.

In addition to weighing economic developments, Fed officials have endured a steady drumbeat of criticism from Trump over past rate hikes. Powell and his colleagues have said repeatedly they’ll ignore the pressure and chart policy according to what best suits the longer-run prospects of the world’s largest economy.

As with recent economic data, the Federal Open Market Committee’s assessment of conditions had something for both hawks and doves.

Officials slightly upgraded their assessment of the economy, saying “economic activity rose at a solid rate” while “the labor market remains strong.”

Weak Spot

That characterization followed a report this week showing consumer spending rebounded in March following a lackluster start to the year. Previous data had pointed to the consumer as a weak spot in an otherwise solid first quarter.

The economy expanded at a 3.2 percent annualized pace from January to March, boosted by exports and inventories growth. The labor market remains robust, with unemployment at around a half- century low and wage gains near the best pace of this expansion.

Still, even with consumption intact and the labor market tightening, inflation has remained vexingly low. The Fed’s preferred price gauge climbed just 1.5 percent in March from a year earlier, well below the central bank’s 2 percent target.

In subtle changes from their last statement, officials said gauges for both overall and core inflation “have declined and are running below 2 percent.” That removed a line from March blaming energy prices for below-target price gains and removed a reference to core inflation being “near 2 percent.”

Inflation Fears

The Fed’s fears over low inflation have been mounting, with Powell recently calling it “one of the major challenges of our time.’’ That’s spurred some speculation that a further slowing in core price gains could prompt officials to cut rates even during a healthy expansion.

In a supplemental statement, officials adjusted a tool they use to keep the fed funds rate within its target range, lowering the interest paid on bank reserves deposited with the Fed to 2.35 percent from 2.4 percent.

This was the third such adjustment in a year for interest on excess reserves, or IOER. As in June and December, the step was taken after the rate banks pay to borrow overnight, known as the effective fed funds rate, drifted upward and threatened to reach the upper end of the target range.

The move “is intended to foster trading in the federal funds market at rates well within the FOMC’s target range,” the technical statement said

.The announcement from the Fed comes a day after President Donald Trump urged the central bank to slash interest rates by as much as a full percentage point.

“Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening,” Trump said in a post on Twitter.

He added, “We have the potential to go up like a rocket if we did some lowering of rates, like one point, and some quantitative easing.”

Some analysts accused the Fed of capitulating to Trump’s demands by revealing after its previous meeting that officials no longer expect to raise rates this year.

The Fed is scheduled to announce its next monetary policy decision after a two-meeting on June 18-19, with CME Group’s FedWatch Tool currently indicating a nearly 71 percent chance rates will be left unchanged.

The FedWatch Tool shows a nearly 27 percent chance that the Fed will lower interest rates by 25 basis points to 2 to 2.25 percent.

The Federal Open Market Committee meeting

The Federal Reserve Act of 1913 charged the Federal Reserve with setting monetary policy to influence the availability and cost of money and credit.

The Federal Open Market Committee (FOMC) meeting is a regular session held by the members of the Federal Open Market Committee, a branch of the Federal Reserve that decides on the monetary policy of the United States.

During these meetings, the FOMC reviews economic and financial conditions and determines the federal funds target rate

A decline in the target rate could stimulate economic growth; however, too much economic activity can cause inflation pressures to build. A rise in the rate limits economic growth and helps control inflation pressures; however, too great an increase can stall economic growth. The FOMC seeks a target rate that will achieve the maximum rate of economic growth.

A change in the federal funds rate can affect other short-term interest rates, longer-term interest rates, foreign exchange rates, stock prices, bond prices, the amount of money and credit in the economy, employment and the prices of goods and services.

So traders and investors around the world usually attempt to predict where monetary policy is headed next in each Fed meeting, and adjust their strategies and portfolios accordingly.

The Federal Funds Target Interest Rate

The federal funds rate is the interest rate that banks charge each other for overnight loans, meaning that it effectively acts as the base interest rate for the US economy. Changes to the federal funds rate will impact short and long-term interest rates, forex rates, and eventually economic factors like unemployment or inflation. This, in turn, will play out across the global economy.

While it doesn’t have a direct say over the rates charged by banks to lend money to each other, the FOMC can indirectly change the fed funds rate using three policy tools that affect money supply. These are open market operations, the discount rate, and reserve requirements.

Open market operations are the buying and selling of government bonds on the open market.

When the FOMC wants to decrease monetary supply it will sell bonds, taking money out of the economy and in turn raising interest rates. When it wants to increase money supply, it will buy bonds, injecting money into the economy and lowering rates.

As well as borrowing this money from each other at the federal funds rate, banks can borrow money directly from the Federal Reserve itself.

The interest rate a bank will have to pay to borrow from the Fed is called the discount rate. A lower discount rate will encourage a lower federal funds rate, and vice versa.

Reserve requirements are the percentage of a bank’s deposits from customers that it has to hold in order to cover withdrawals.

If reserve requirements are raised, then banks can loan less money and will ask for higher interest rates. If they are lowered, then the opposite happens.

Quantitative easing (QE) is an extra measure that the Fed can apply in times of severe financial situation. It is usually only used once the above policy tools have been exhausted.

In function, QE looks fairly similar to open market operations. The FOMC buys securities on the open market, injecting money directly into the system.

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