Fed on Hold, as Expected

Gary Pzegeo, CFA
January 29, 2020

The Federal Reserve left the range of policy rates unchanged at its January meeting and made a small adjustment to a rate paid on excess system reserves.

The Federal Reserve left the range of policy rates unchanged at its January meeting and made a small adjustment to a rate paid on excess system reserves.  In case anyone was concerned about its commitment to stability, the FOMC also left all but 2 or 3 of its 270+ word press release unchanged from its December 11, 2019 meeting.  In the post-meeting press conference, Chairman Powell reiterated the Fed’s accommodative approach in the face of slow growth and even slower inflation.  Powell’s characterization of the economy remained positive, yet he highlighted specific risks from the Coronavirus and business sector reaction to recent trade agreements. 

Here is a summary of today’s release:

Growth & Inflation

Growth in household spending was downgraded from “strong” to “moderate”.  There has been little change in the low level of inflation expectations.

Forward Guidance

The Fed sees the current stance of policy as appropriate.  Previous statements included a phrase indicating that appropriate monetary policy would support core inflation “near” 2%.  Today’s statement changed the wording to state that appropriate policy would return inflation to the 2% objective.  Powell stated that the small change in the press release was made to underscore the Fed’s commitment to 2% inflation “not being a ceiling”. 

Implementation

The target range remains 1.50% to 1.75%.  Interest on excess reserves (IOER) will increase from 1.55% to 1.60% in order to keep the effective rate in the middle of the target range.  IOER has moved away from the center of the target bands in the past to counter market forces.  The Fed will continue buying T-Bills into the second quarter as they gradually return the balance sheet to a level of excess reserves in place prior to the September disruptions in short-term funding markets.

The combined effects of the Fed’s press release and Powell’s press conference were generally seen as dovish across fixed income and currency markets. 

View the full FOMC statement

 

Gary Pzegeo joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.