- Fed funds target range held at 1.50-1.75%; no dissents
- Interest on excess reserves raised by 5 basis points
- Policy statement more or less copied from December
If the Fed’s first policy announcement of 2020 is any indication, this year will be a much less eventful one for the central bank. Aside from two minor word changes (consumer spending growth now described as “moderate” rather than “strong” and current policy geared toward inflation “returning to” rather than “near” the Fed’s 2% objective) the statement was a carbon copy from December’s. There were some tweaks to monetary policy plumbing—a 5 basis point increase in IOER to help keep fed funds in the middle of its target range, and extending repo operations at least through April to prevent dislocation in money markets—but nothing to indicate the Fed is considering actual policy changes. Having lowered rates by 75 basis points in 2019, the current monetary policy stance is seen as “appropriate” while the committee continues to keep an eye on global developments and muted inflation pressures.
Chair Powell’s press conference did have some nuggets of information which markets viewed as slightly dovish. He noted grounds for “cautious optimism” about the global growth outlook but said a rebound is not assured. Regarding the coronavirus outbreak, Powell said there’s likely to be some disruption to economic activity in China and potentially its neighbours and trading partners, but that it’s too early to speculate about the scale of the impact. On inflation, he noted that the tweak to the Fed’s policy statement was meant to clarify that policymakers will not be satisfied with inflation continuing to run below the Fed’s objective, and that 2% is not a ceiling. That seems to indicate rate hikes will remain off the table until core inflation returns to at least 2% on a sustained basis—something Chair Powell has suggested in the past. In that sense, it’s not surprising that markets think the Fed is more likely to lower rather than raise rates this year. Our forecast assumes fed funds will be held steady throughout 2020.
