The Federal Reserve held interest rates steady following its two-day meeting this week and indicated that no action is likely next year amid persistently low inflation.
Concluding a year that saw the central bank take down its benchmark rate three times, the Federal Open Market Committee on Wednesday met widely held expectations and kept the funds rate in a target range of 1.5%-1.75%.
“The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective,” the statement said.
“The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate,” the committee added.
- ‘Dot plot’ shows no 2020 hike now
Through the “dot plot” of individual members’ future projections, the FOMC indicated little chance of a cut or increase in 2020.
At the committee’s September meeting, individual members were split on what could happen next year, with eight members seeing no change and nine indicating the likelihood of one or more increases. One member even foresaw three hikes. On balance, the estimate then was for at least one hike in 2020.
There also was a general downward shift for 2021, with the chart pointing to at least one and possibly two increases. The central projection came down for each of the four years included in the committee’s estimates. The median expectation for the funds rate is 1.6% in 2019 and 2020, down from 1.9% in the September estimate, and rising to 1.9% in 2021, compared with the previous estimate of 2.1%. The 2022 projection also came down to 2.1% from 2.4%, though the longer-run estimate remained consistent at 2.5%.
- GDP forecast
The more dovish tilt came without any changes in expectations for U.S. economic growth. The committee again projected 2019 to finish with a 2.2% gain in gross domestic product, followed in consecutive years by 2%, 1.9% and 1.8% gains.
Members did reduce their inflation expectations this year.
They now see the core personal consumption expenditures gauge to register just 1.6% growth this year, down from the 1.8% projection in September. They kept their estimates consistent at 1.9% in 2020 and 2% for the following two years.
· Federal Reserve Chairman Jerome Powell said Wednesday that he’d prefer to let inflation rise and hold above the central bank’s target before considering future interest rate hikes.
“In order to move rates up, I would want to see inflation that’s persistent and that’s significant,” Powell said at a news conference in Washington. “A significant move up in inflation that’s also persistent before raising rates to address inflation concerns: That’s my view.”
Powell cautioned, however, that the Fed’s reluctance to hike rates again isn’t a strict, codified rule.
· The U.S. dollar fell on Wednesday to a four-month low against a basket of currencies after the Federal Reserve held interest rates steady and Fed Chair Jerome Powell said a significant, persistent inflation rise would be needed to hike rates.
The Fed left the benchmark overnight lending rate in its 1.50% to 1.75% target range, and the U.S. central bank’s rate-setting committee said after its two-day policy meeting that it expects moderate economic growth and low unemployment through next year’s presidential election.
The dollar index .DXY, which measures the greenback against six other major currencies, was 0.33% lower at 97.095, its lowest since Aug. 9.
“If we do see a delay in tariffs, that clears the way for other currencies to rise relative to the dollar,” Schamotta said.
The euro was 0.4% higher ahead of new ECB boss Christine Lagarde’s first policy meeting on Thursday. Investors will scrutinize her every word.
· With British voters heading to the polls on Thursday for the third time in four years, markets have mostly priced in a majority for Prime Minister Boris Johnson’s Conservative Party.
YouGov’s final poll projected a 28-seat majority, considerably tighter than previous estimates, and indicated that neither a hung parliament nor a more comprehensive Conservative majority can be ruled out.
Britain’s governing Conservatives have seen their lead over the opposition Labour Party cut to five percentage points, according to a Savanta ComRes poll for The Telegraph newspaper published on the eve of an election.
Prime Minister Boris Johnson’s party stands unchanged at 41%, according to the survey, whilst Labour was up 3 percentage points to 36%, the smallest lead recorded by the pollster since mid-October and the best showing for Labour since January.
Sterling slid on Wednesday morning as some caution returned to a currency market which had largely priced in a clear Conservative victory. Speculative sterling shorts, in which investors bet on the pound depreciating, have reduced considerably since mid-September.
· The initial price action is likely to take place around the 10:00 p.m. GMT (5:00 P.M. ET) exit poll on Thursday, at which point all previous polling becomes irrelevant. A clear blue majority sends the pound up, while anything else likely exerts downward pressure.
A host of marginal seats are due to be called after 00:30 a.m. GMT, and tactical voting along Brexit lines in key marginals could add to uncertainty. Further price action is possible as the results of these seats are announced.
· Oil prices dropped about 1% on Wednesday following a surprise build in U.S. crude inventories, and as investors waited to see if a fresh round of tariffs by Washington on Chinese goods would come into force on Sunday.
Brent futures fell 62 cents, or 1%, to settle at $63.72 a barrel. West Texas Intermediate crude slipped 48 cents, or 0.8%, to settle at $58.76 a barrel.
U.S. crude stockpiles rose unexpectedly last week, while gasoline and distillate inventories jumped sharply higher, the Energy Information Administration said.
Crude inventories rose 822,000 barrels last week, compared with analysts’ expectations in a Reuters poll for a 2.8 million-barrel drop. At 447.9 million barrels, crude stocks were about 4% above the five-year average for this time of year, the EIA said.
Reference: CNBC, Reuters
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