Thursday, January 31, 2019

For the first time in recent memory, No Rate Increases in Near Future?



WASHINGTON — For the first time in recent memory, the Federal Reserve has indicated it doesn’t anticipate any additional rate increases. A statement made following the just-concluded meeting of the Federal Open Market Committee (FOMC) is a break from another statement made just a month ago, and runs counter to the forecast from many that the Fed will raise interest rates two times in 2019.

In its statement, the Fed said the economy remains “solid” and that it expects economic growth to continue. 

But the FOMC also said, “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 to support these outcomes.”


As it typically states following its meetings, the Fed said it will continue to assess conditions relative to its objective of a 2% inflation rate. The inflation rate has been sluggish for more than a decade.

Another Surprise
In another surprise announcement, the Fed also announced it is now ready to slow down or even reverse its ongoing efforts to shrink its bond portfolio, even though in 2018 it indicated it remained committed to doing so. 

After amassing more than $4 trillion in Treasury securities and mortgage bonds following the financial crisis, the  Fed has been reducing its holdings by approximately $45 billion per month.  
“The committee is prepared to adjust any of the details for completing the balance sheet normalization in light of economic and financial developments,” the Fed said in a statement, indicating it is even prepared to increase holdings if necessary. 

In addition, the Fed also issued a statement that “after extensive deliberations and thorough review of experience to date, the Committee judges that it is appropriate at this time to provide additional information regarding its plans to implement monetary policy over the longer run. Additionally, the Committee is revising its earlier guidance regarding the conditions under which it could adjust the details of its balance sheet normalization program.”

Additional Statement
Accordingly, the Fed said all participants agreed to the following:

  • The Committee intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required.
  • The Committee continues to view changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy. The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. Moreover, the Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.


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