“The Fed’s dovish shift was likely designed to decrease downside risks, and our findings suggest that this has largely worked as planned. As the lingering effects of the Q4 tightening gradually fade away, the Fed may eventually be willing to revisit the need for patience, as indicated in the January minutes,” economists noted.
Following the central bank’s decision to keep interest rates unchanged last month, there’s been a recurring theme of “patience” in Fedspeak as of late. Federal Reserve Chairman Jerome Powell reiterated patience during last month’s press conference following the rate announcement and also mentioned that the U.S. economy is in a “good place.”
In move that was widely anticipated by most market experts, the Federal Reserve last month 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.
“Financial conditions have eased significantly in 2019, with the FCI (financial conditions index) now reversing roughly 80% of the tightening in 2018Q4,” the economists wrote.
In terms of quantitative tightening, the Fed has been alluding to more flexibility with its holdings of Treasuries and mortgage-backed securities. The central bank has been on a path towards a reduction in assets, which would come prior to the end of 2019.
“Our analysis also suggests that downside risk will likely be contained in the near-term, barring another large tightening in the FCI. In addition to the reversal of much of the Q4 FCI tightening, US growth momentum has improved and global growth appears to be stabilizing,” they wrote.
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However, latest minutes from the last Federal Reserve meeting show that the door isn’t completely shut on the idea of raising interest rates.
“Several participants noted that their views of the appropriate range for the federal funds rate could shift in either direction based on incoming data and other developments,” the meeting summary stated. “Some participants indicated that if the economy evolved as they currently expected, with economic growth above its longer-run trend rate, they would likely judge it appropriate to raise the target range for the federal funds rate modestly later this year.”
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