Fed holds rates steady with no change through 2020

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The Federal Reserve left its policy rate unchanged at 1.5-1.75 per cent and indicated without dissent that it had no plans to make any more changes in 2020.

After a two-day meeting in Washington on Wednesday, policymaker predictions for the likely future path of the Fed’s policy rate showed a decisive shift toward a more accommodative path over the next three years.

In September, when the Fed last published its predictions, the median policy rate proposed for 2022 by participants in the Fed’s Open Market Committee was 2.4 per cent. That has dropped to 2.1 per cent.

Policymakers showed more confidence in the US labour market, lowering their predictions for unemployment for the next three years, and even dropping their estimate of the likely long-term unemployment rate, to 4.1 per cent, from 4.2 per cent when they last published predictions in September.

In its statement, the committee said that the current stance of monetary policy “is appropriate,” a change from October’s statement, and cut a reference to “uncertainties” in its outlook. The committee added that as it looked to the future, it would monitor incoming information “including global developments and muted inflation pressure.”

The decision to leave rates as they are was widely expected by markets, but the shift toward more confidence in the labour market, paired with a plan to continue hold rates below their 2018 levels for several years, show a central bank that is shedding its traditional fear of inflation, and shifting its focus toward continuing to support the US labour market. As in October, there were no dissents.

The S&P 500 and Nasdaq Composite held on to earlier gains after the announcement, and the Dow Jones Industrial Average rose 0.04 per cent.

The benchmark 10-year Treasury note yield rose 1 basis point to 1.81 per cent, while the yield on the more policy-sensitive two-year note steadied at 1.64 per cent.

“You could make the argument that taking out the ‘uncertainties’ line is hawkish, but it is more likely a signal that they feel pretty confident about what they have achieved and where they are with rates,” said John Briggs, head of strategy at NatWest Markets. For Mr Briggs, that assessment could be premature considering trade is going to be a “lingering issue” well into next year.

Moreover, he said the inflation issue, alongside continued trade war concerns, could force the Fed’s hand to cut interest rates twice in 2020 — one more than markets are pricing in at the moment.

The Fed carried out three cuts in 2019, in what it described as an insurance policy against trade uncertainty, low inflation and a global slowdown. In October it indicated that it would pause, waiting for Mr Powell called at the time a “material reassessment” of economic conditions.

Wednesday’s Statement of Economic Projections, a collection of policymaker predictions on economic data and the likely policy path, showed a strong shift toward consensus on the current policy rate.

In September, there were seven Fed presidents or governors proposing a rate above 2 per cent for 2020. Now there are none, with only four policymakers proposing just a single rise next year.

There were also small changes in the distribution of policymaker predictions for appropriate policy over the longer run, a sign that some at the Fed is beginning to think that its estimate of the “neutral rate” — the policy rate at which it is stepping on neither the brake, nor the gas — continues to fall.

In September, there were five policymakers above the median longer-run appropriate policy rate of 2.5 per cent, and three below. Now there are four above, and four below, showing some converts.

The median — what the Fed considers “neutral” — remained unchanged at 2.5 per cent. It has been dropping ever since the Fed started to publish it in 2012. It started at 4.3 per cent that year, hovered around 3 per cent after 2016, and then began to drop again in late 2018.

Despite the new language suggesting concern over inflation, the Fed’s economic projections showed no changes to inflation predictions, over the short or long-run.

The Fed’s favoured measure of inflation was at 1.6 per cent in October, down from 2 per cent over much of 2018. Market-based measures of inflation dropped for much of the time the Fed was signalling and carrying out its rate cuts this year. As the committee met, markets showed no faith that inflation would rise above 1.8 per cent, even five years from now.

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