Wednesday, June 19, 2019

US Fed holds rate but sees cut in 2021 amid uncertainty

     The Federal Reserve, the U.S. central bank, left its benchmark target for the federal funds rate steady at 2.25 to 2.50 percent but acknowledged growing uncertainty about the economic outlook and forecast a rate cut next year, a sharp change from March when it had forecast a rate hike.
      Echoing Chairman Jerome Powell's statement from June 4, the Fed said it would "act as appropriate to sustain the expansion" in light of the rising uncertainty and muted inflation pressures, a another sharp change from March when the Fed said it would be "patient" while observing global economic and financial developments.
      Today's statement by the Fed's policy-making body, the Federal Open Market Committee (FOMC), continues the steady shift away from its tightening monetary policy stance since January this year following 9 rate hikes since December 2015.
      Unlike its decisions in January and March, the FOMC was split today, with James Bullard, president of the St. Louis Fed, voting for a 25 basis point cut. The other 9 committee members voted to maintain the rate.    
      In an update to its economic forecast, the FOMC projected the funds rate would average 2.4 percent this year, unchanged from its March forecast, but then drop to 2.1 percent in 2020 as compared with an increase to 2.6 percent that was projected in March, implying one cut of 25 basis points.
      In 2021 the rate was seen rising back up to 2.4 percent, but still down from 2.6 percent previously forecast.
      Illustrating the downward path in rates, the longer-run funds rate was forecast at 2.5 percent, down from 2.8 percent, as economic growth was seen decelerating to 2.0 percent in 2020 from 2.1 percent in 2019 and then 1.8 percent in 2021.
      As in March, the Fed said the U.S. labor market remains strong, but added economic activity was "rising at a moderate rate," down from its March view that activity was rising "at a solid rate," as business fixed investment has been "soft" despite household spending picking up from earlier in the year.
      The jobless rate was forecast to slowly rise to 3.8 percent in 2021 from 3.7 percent in 2020 and 3.6 percent in 2019 while inflation, as expressed in personal consumption expenditure, is seen slowly rising to 2.0 in 2021 from 1.9 percent in 2020 and 1.5 percent this year, down from the March forecast of 1.8 percent.


      The Board of Governors of the Federal Reserve System released the following statement:
"Information received since the Federal Open Market Committee met in May indicates that the labor market remains strong and that economic activity is rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren. Voting against the action was James Bullard, who preferred at this meeting to lower the target range for the federal funds rate by 25 basis points."


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