–Holds Rate Steady; Dots Suggest ‘Roughly’ 2% ’19 Growth and No Hikes
–When Data Clarify, ‘We Will Act Appropriately’
By Denny Gulino
WASHINGTON (MaceNews) – The Federal Open Market Committee and its Chairman Jerome Powell Wednesday reassured markets that not enough is known about this year’s economy to either raise or lower interest rates and that without intending any quantitative tightening, the balance sheet will be stabilized by September at about $3.5 trillion.
The stock markets outside of the financial sector moved very little, neither heartened by the reassurance of continued U.S. growth and a paralyzed Fed nor immediately dismayed by Fed confirmations of growth slowdowns in the U.S., Europe and China. Including bank stocks, the Dow industrials ended the day down 141 points.
With the 10-year Treasury at 2.535%, the lowest yield since Jan. 3 of last year – and a 24/32 rally in price on the day – the Federal Open Market Committee decided, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,” in the words of the post-meeting statement.
While there was no commitment as to how long patience might last nor on exactly what the end of patience would depend upon, the Fed did settle on the terminal size of its balance sheet, around $3.5 trillion, or 17.5% of GDP, by September.”
Powell, in his post-meeting news conference, emphasized that the Fed is not considering its revised balance sheet policy to be an instrument of monetary policy, regardless of the views of most market participants..
Asked if there is some kind of quantitative tightening under way by way of the balance sheet, Powell answered, “The answer is really no.”
He continued, “We think of the interest rate tool as the principal tool of monetary policy. We think of ourselves as returning the balance sheet to a normal level over the course of the next six months and we’re not really thinking of those as two different tools of monetary policy.
The quarterly dot plot, that had been expected to suggest only one rate hike this year, instead went further and after this meeting implied no rate hike at all. As Powell pointed out once again, the dot plot does not amount to a Fed decision.
Powell again set out the arguments for continued “healthy” U.S. growth this year with no signs of recession domestically nor in Europe or China. Yet “healthy” did not imply for the Fed any threat of overheating in the context of a stubbornly quiescent inflation rate. Nor did growth of “roughly” 2% suggest any rate cut might be appropriate either, though some models were building that in for 2020.
“We don’t see any data pushing us to move rates in either direction,” Powell said, repeating that sentiment in different words several times.
“I think we’re in a good place right now,” he said. “We’re going to watch carefully and patiently as we allow events to evolve and when they do clarify we’re going to act appropriately.”
So the “good place” will remain with a fed funds rate of 2.25 % to 2.50% for the indefinite future, as data that has seen recent exceptionally wide month-to-month ranges in retail sales and employment continues to arrive amid forecasts that are similarly wide ranging – and market rates that continue to ease and flatten the yield curve.