Following the central bank’s decision to keep interest rates unchanged, a recurring theme of “patience” was mentioned in Federal Reserve Chairman Jerome Powell’s press conference following the rate announcement. Additionally Powell mentioned that the U.S. economy is in a “good place.”
In move that was widely anticipated by most market experts, the Federal Reserve on Wednesday elected to keep rates unchanged, holding its policy rate in a range between 2.25 percent and 2.5 percent. In addition, the central bank alluded to no more rate hikes for the rest of 2019 after initially forecasting two.
“The U.S. economy is in a good place,” said Powell. “We will continue to use our monetary policy tools to help keep it there. The jobs market is strong, showing healthier wage gains and prompting many people to join or remain in the workforce. The unemployment rate is near historic lows and inflation remains near our 2 percent goal.”
The capital markets initially expected rates to remain steady after the central bank spoke in more dovish tones following the fourth and final rate hike for 2018 last December. Prior to the announcement, the CME Group’s FedWatch Tool was expecting a 98.7 percent chance that rates would remain steady.
“We continue to expect that the American economy will continue to grow at a solid pace in 2019 although likely lower than the very strong pace in 2018,” said Powell. “We believe our current policy stance is appropriate.”
More Patience in Store for Fed
“Patience” has been a mainstay in Fedspeak since the December rate hike and again in January when the central bank elected to keep the federal funds rate unchanged, saying that it will be patient moving forward with respect to further rate adjustments. Moreover, the Fed has also been saying that it will be mostly data-dependent and have more flexibility when it comes to interest rate policy decision-making.
“Since last year, we’ve noted some developments at home and around the world that bear our close attention,” said Powell. “Given the overall favorable conditions in our economy, my colleagues and I will be patient in assessing what, if any, changes in the stance of policy may be needed.”
“Much of the discussion at our meeting focused on what we should make of the varied indicators,” added Powell, “Today’s summary of economic projections, the SEP, reflects the assessments of individual committee participants and these views are in line with a broad range of other forecasts and point to a modest slowdown with overall conditions remaining favorable.”
The market sell-offs during the fourth quarter of 2018 also gave the Fed more pause with respect to rate hikes. During Federal Reserve Chairman Jerome Powell’s semiannual testimony before Congress last month, he mentioned that “crosscurrents and conflicting signals” are warranting a patient approach with respect to interest rate policy.
“The federal funds rate is now in the broad range of estimates of neutral–the rate that neither tends to stimulate nor restrain the economy,” Powell said. “As I noted, my colleagues and I think that this setting is well-suited to the current outlook and believe that we should be patient in assessing the need for any change in the stance of policy.”
In a prepared testimony to Congress in February, Powell said that domestic and global developments have “along with ongoing government policy uncertainty, warranted taking a patient approach with regard to future policy changes.” Furthermore, Powell said that economic data will continue to be the primary driver in future Fed decisions, but will be more flexible with the inclusion of new data.
Following the announcement, the Dow Jones Industrial Average effectively erased a 200-point loss in the early trading session to settle for a 30-point as of 3:00 p.m. ET.
The rate decision comes after results from a survey of central bank respondents revealed that gross domestic product is expected to slow to a 2.33 percent rate of growth this year after initially forecasting 2.44 in January.
The 2.33 GDP growth reading is also lower than that of the current growth rate of 3.1 during the fourth quarter of 2018. Things aren’t looking much better for 2020 as survey respondents are expecting GDP to grow under 2 percent.
On the topic of trade, the majority of respondents are expecting a U.S.-China trade deal to materialize this year. 79 percent of respondents are expecting a deal, while 2 percent foresee a new round of tariffs and 17 percent expect tariffs to continue at their current pace.
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