Jerome Powell, chairman of the U.S. Federal Reserve,listens during an Economic Club of Washington discussion in Washington, D.C., U.S. (Photographer: Al Drago/Bloomberg)

Fed Adopts ‘Patient’ Rate Stance With Balance-Sheet Flexibility

(Bloomberg) -- The Federal Reserve signaled it’s done raising interest rates for at least a while and will be flexible in reducing its bond holdings, a sweeping pivot from its bias toward tighter monetary policy just last month.

U.S. stocks rallied, Treasury yields fell and the dollar sank as investors digested the new message from the central bank, which marked a broader shift toward sustaining the expansion -- rather than preventing any overheating -- and follows months of criticism from President Donald Trump for raising rates too much.

The Federal Open Market Committee “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,” the central bank said in a statement Wednesday following a two-day meeting in Washington, opening the door for the next move to also be a cut. In a separate special statement, the Fed said it’s “prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.”

Fed Adopts ‘Patient’ Rate Stance With Balance-Sheet Flexibility

“It’s hard to read this as anything other than the Fed has capitulated to the market,” said Michael Gapen, chief U.S. economist at Barclays Plc. “The market will read this as they’re done with the hiking cycle and that a halting in the balance sheet runoff is more likely than another rate hike.”

Chairman Jerome Powell told reporters that while the U.S. economy was in a good place, slowing growth in China and Europe, Brexit, trade negotiations and the effects of the five-week U.S. government shutdown had sent conflicting signals on the outlook.

“At such times, common-sense risk management suggests patiently awaiting greater clarity, an approach that has served policy makers well in the past,” he said.

Asked if the Fed still had a bias toward hiking rates, Powell said, “I would want to see a need for further rate increases, and for me, a big part of that would be inflation. It wouldn’t be the only thing, but it would certainly be important.”

Trump later tweeted about the stock market’s gain on Wednesday, calling the Dow Jones Industrial Average’s rise past the 25,000 level “Tremendous news!”

The FOMC dropped previous language calling for “some further gradual increases” in interest rates and opened the door for the next move to be either up or down, as it cited “global economic and financial developments and muted inflation pressures.” Policy makers also omitted a line saying risks to the outlook are “roughly balanced.”

“Inflation is the main story,’’ said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC. “Inflation is a notoriously slow moving process. It is going to be awhile before we know’’ and the Fed is likely on hold through “June, most likely September.’’

Balance Sheet

On the balance sheet, Powell said the normalization process will be completed “sooner and with a larger balance sheet" than previous estimates.

The committee said it will continue to run monetary policy in an ample-reserve regime, where control over short-term interest rates “is exercised primarily through the setting of the Federal Reserve’s administered rates.” That suggests a larger balance sheet than would be the case if the Fed went back to its pre-crisis approach to managing rates.

The 10-0 vote on the decision held the target range for the federal funds rate at 2.25 percent to 2.5 percent. The statement was in line with the views of more than two-thirds of economists surveyed by Bloomberg News last week, who said the Fed would alter language on “some further gradual increases” and would instead signal greater uncertainty, refer to patience or remove the line entirely.

What Our Economists Say

“The guidance of the January FOMC statement strongly implies that Fed officials are contemplating the end of the tightening cycle. The communique removed all suggestion that the next move from policy makers would be a rate increase, and instead said the ‘Committee will be patient’ in determining future adjustments to interest rates.”

-- Carl Riccadonna, Yelena Shulyatyeva and Tim Mahedy (Bloomberg Economics)

Officials gathered in Washington with less visibility on the economy after a five-week government shutdown delayed the release of some statistics including December retail sales and fourth-quarter gross domestic product.

Even without a full flow of data, the Fed said household spending “has continued to grow strongly” while business investment growth had moderated since earlier in 2018. The committee said economic activity “has been rising at a solid rate” and job gains have been strong. There was no reference to the shutdown in the FOMC statement.

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