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US Fed holds rates, warns coronavirus outbreak makes outlook uncertain

By Reuters

  • 30 Jan 2020
US Fed holds rates, warns coronavirus outbreak makes outlook uncertain
Fed Chairman Jerome Powell | Credit: Reuters

The Federal Reserve held interest rates steady on Wednesday at its first policy meeting of the year, with the head of the U.S. central bank pointing to continued moderate economic growth and a “strong” job market, and giving no sign of any imminent changes in borrowing costs.

“We believe the current stance of monetary policy is appropriate to support sustained economic growth, a strong labor market and inflation returning to our symmetric 2% objective,” Fed Chair Jerome Powell said at a news conference following the central bank’s unanimous decision to maintain the key overnight lending rate in a range of between 1.50% and 1.75%.

He noted signs that global economic growth was stabilizing and diminishing uncertainties around trade policy, concern about both of which were key factors in the Fed’s decisions to cut rates three times last year.

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But, he added, “uncertainties about the outlook remain, including those posed by the new coronavirus.” The outbreak of the new flu-like virus in China has led to fears of a further slowdown in the world’s second-largest economy.

After ticking off a list of positive developments, including the initial trade agreement reached recently by the United States and China and some indication a slip in global manufacturing has hit bottom, Powell noted China’s economy would see at least a short-term hit from the coronavirus outbreak.

“We are very carefully monitoring the situation,” Powell told reporters, adding that while the implications of the outbreak for China’s output are clear, it is “too early” to determine its global effect or impact on the U.S. economic outlook.

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The Fed’s statement, calling out solid job gains and low unemployment, was little changed from the one issued after its December meeting.

“The Fed’s going to remain on hold for the foreseeable future, as long as GDP growth and inflation doesn’t move outside of the bands that we’re stuck in, anchored right around 2%,” said Chris Gaffney, president of world markets at TIAA Bank.

The Fed’s statement did not announce any immediate changes to the central bank’s current practice of buying $60 billion monthly of U.S. Treasury bills to ensure adequate short-term liquidity in bank funding markets.

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But Powell said the Fed would likely begin scaling back that amount sometime in the April-June period, when the amount of reserves in the banking system would likely be deemed adequate.

After that, purchases would be made and the Fed’s balance sheet expanded as necessary to ensure the level of bank reserves remained “ample,” he said.

Fed policymakers have been discussing how and when to end the temporary Treasury bill purchases, which have been underway since October, and what sort of permanent replacement it could use to ensure the central bank keeps control of the federal funds rate.

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Yields on U.S. Treasury securities ground lower as Powell spoke, while benchmark U.S. stock market indexes gave up most of their gains on the day. The dollar .DXY was largely flat against a basket of major trading partner currencies.

Technical adjustment

In a related decision, the Fed raised the interest it pays banks for excess reserves by five basis points to 1.60%, a technical adjustment officials say was needed to keep the federal funds rate around the middle of the target range.

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The interest rate decision was widely expected, with recent economic data showing the economy on track for continued growth, and no sign inflation is rising so fast that it poses a risk the Fed might need to counter with higher borrowing costs to slow the economy.

“The vote was unanimous. That implies that the Fed is going to stay on hold here,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. “Of course, they always leave the door open.”

The Fed cut rates last year to bolster an economy buffeted by trade wars, and has set a high bar for any further rate changes. Powell has said a “material reassessment” of the economic outlook would be required for any shift.

The Fed’s assessment of household spending was marked down slightly from a “strong pace” in its December statement to a “moderate” pace. The Fed also noted that business fixed investment and exports “remain weak.”

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