Fed leaves low rates alone and sees no moves in near future

Daniel Fowler
December 12, 2019

The Federal Reserve is expected to maintain its target interest rate range at between 1.5% and 1.75% on Wednesday afternoon when it releases its post-meeting statement at 2 p.m. Investors will be watching for any surprise changes to rates and indications from the Fed about where rates could be heading in 2020 after three rate cuts in 2019.

On Wednesday, when its latest meeting ends, the Fed is expected to project that its benchmark rate will remain unchanged through next year.

The decision by the US central bank's rate-setting committee left the benchmark overnight lending rate in its current target range between 1.50% and 1.75%. It reflects its view that the US economy has so far withstood the U.S. Investor jitters over whether the US and China will be able to avert a new escalation in their trade war have made for choppy trading this week.

Tom Essaye, founder of Sevens Research Report, said this week he expects no change to interest rates and very little deviation in the Fed's statement from a month ago.

"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", said the statement.

Powell and other Fed policymakers have made clear that they are no longer anxious that a healthy job market will necessarily fuel excessive inflation. The new tariffs are scheduled to take effect Sunday and would mark an escalation in the trade war as the world's two largest economies continue pushing for a deal. The consumer-price index tends to run a bit higher than the personal-consumption index, but both gauges generally follow the same path.

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"We believe monetary policy is well-positioned to serve the American people by supporting continued economic growth, a strong job market and inflation near our 2 percent goal", Powell said.

Sales of new and existing homes have picked up this year, and auto sales have stayed healthy.

"The threshold for a rate hike remains much higher than the threshold for a rate cut". However, if the 2020 median dot fall significantly lower, Essay said it would indicate a return of the "risk on" trade in the market.

"If I were Powell, I would say I have things exactly where I want them", said David Jones, an economist and author of five books on the Fed. "Despite all the people who criticized Powell for not easing sooner or not easing more, it looks like this mid-course correction of three rate cuts was nearly ideal in keeping the economy growing on a sustained basis". In late September, overnight lending markets seized up, and banks and other financial institutions struggled to find short-term loans.

The Fed could eventually expand its Treasury bill purchasing program to shorter-term coupon debt, he added. That makes it different, he says, from the Fed's bond purchases during the Great Recession and its aftermath, when it sought to drive down long-term borrowing rates to stimulate spending and economic growth.

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