Fed pledges patience on rate hikes

Fed pledges patience on rate hikes

Fed Chairman Jerome Powell said the case for rate increases had "weakened" in recent weeks, with neither rising inflation or financial stability considered a risk, and "cross-currents" including slowing growth overseas and the self-inflicted wound of a federal government shutdown making the USA outlook less certain.

Moreover, the Fed said it could "adjust the details of its balance sheet normalization program", which now is set to let $50 billion of its holdings of Treasury and USA agency mortgage-backed securities mature each month without replacing them. "Market concerns towards the Fed's rate hikes have now been put to rest", said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management in Tokyo.

US stocks rallied after the announcement, Treasury yields fell and the dollar sank.

Besides earnings, investor sentiment was boosted by an ADP employment report that showed the private sector added 213,000 jobs in January, far stronger than the 170,000 economists were expecting. But it removed language from its December policy statement that risks to the outlook were "roughly balanced".

Powell has been invoking the word "patient" to describe the Fed's latest approach to rates increases.

It may also raise questions about whether the Fed's shifting stance - until recently Powell and other officials said monetary policy was unnecessarily loose - is a response to pressure from volatile financial markets or President Donald Trump.

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"The back-drop of slowing economic growth on a global basis is the 800 trillion gorilla in the room", Pascualy said.

Taken together with the balance sheet announcement, the Fed's statement gives maximum flexibility to a central bank criticized by investors who saw the Fed itself becoming a source of market turbulence that was reflexively tightening policy even as economic risks mounted.

The 10-0 vote on the decision held the target range for the federal funds rate at 2.25 percent to 2.5 percent. Powell will then give a news conference, beginning a policy of speaking with reporters after each of the Fed's eight meetings every year, rather than only four times a year.

The Fed raised rates four times last year including in December, when it signaled it would do so twice more this year. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier a year ago.

The statement removed a long-standing reference to future rate hikes, saying only that it would continue to rely on data for future decisions, and referenced muted inflation in recent months, but reiterated that the US economy remains on solid footing. There was no reference to the shutdown.

The central bank also remains optimistic on inflation. The statement reaffirmed the central bank's 2 percent inflation target, and again stressed its symmetry, meaning it would be concerned if it persistently ran above or below that target.

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