With Headwinds in Front, the Fed Doubles Down on Its Patient Approach to Rates

(Bloomberg) -- The Federal Reserve reiterated on Friday a patient stance on future interest-rate changes in a robust domestic economy that faces potential headwinds including slower global growth and market volatility.

“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the federal funds rate may be appropriate,” the Fed said in its semi-annual Monetary Policy Report to Congress released in Washington.

Chairman Jerome Powell, who testifies before Congress next week, delivered a similar message in a Jan. 30 press conference by saying the Fed would be patient in the face of a mounting set of risks, including slowing growth in China and Europe, Brexit, trade negotiations and the effects of the five-week U.S. government shutdown. He spoke after policy makers left the key interest rate unchanged in a range of 2.25 percent to 2.5 percent.

Friday’s report said inflation expectations remain stable despite stronger wage gains and a labor market that “continued to strengthen” since the middle of last year. U.S. payrolls in January increased the most in nearly a year, topping all forecasts, while average hourly earnings rose 0.1 percent from the prior month following a 0.4 percent gain in December.

‘Solid Rate’

The U.S. economy has expanded at “a solid rate” and consumer spending was strong throughout 2018, though it may have weakened at year-end, according to the report. Retail sales fell 1.2 percent in December from the previous month, the most since 2009.

Central bankers in the report flagged investor appetite for risk had deteriorated amid concerns about future growth and trade tensions with China. Still, credit to large non-financial companies remained “solid” in the second half of 2018, the Fed said.

The report included a special section on the balance sheet, which it is allowing to shrink following large-scale asset purchases in the wake of the 2008 financial crisis. Some officials have signaled of late that they may end the normalization program this year.

Friday’s report said that, despite the shrinkage, the portfolio would remain “considerably larger” than it was before the crisis. At the same time, officials are prepared to adjust any details in completing the normalization “in light of economic and financial developments.”

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