No Change In Fed Interest Rate, But Plenty Of Surprises

The Fed Open Market Committee (FOMC) held its first policy meeting of 2019 this week, and Fed Chairman Jerome “Jay” Powell held a press conference afterward. As I have written earlier this month, the Fed has significantly changed its position on interest rates since late last year. As recently as December, the Fed was indicating it would probably raise interest rates three times this year.

Yet as I have written in the last few weeks, the Fed has been dropping hints that it has softened its view on rate hikes, using carefully chosen words like “patient” and “wait and watch.”Well, yesterday the Fed made it official. There may be only one or zero Fed Funds rate hikes this year. What a switch!

In his press conference after the Fed policy meeting yesterday, Mr. Powell said, “The case for raising rates has weakened somewhat.” Asked if the next move would be up or down, Mr. Powell said it would depend on incoming data. The Fed previously had a strong inclination to raise rates.

Chairman Powell indicated yesterday that the US economy is in a good place (solid growth). However, the Fed is concerned that financial conditions have tightened, global growth is slowing and the outcome of ongoing trade disputes (China) remains uncertain, as does the outcome of Brexit.

In his news conference, Powell noted that because inflation remains low, this gives the FOMC the latitude to see how these various issues can be resolved before deciding on the appropriate path of the Fed Funds rate going forward.  This is a big change, and I think it makes sense.

Most Fed-watchers took that to mean the Fed won’t hike rates in the first half of this year. Then Powell went a step further and hinted that if some of these outstanding issues are resolved, and if the economy remains in a good place, the Fed might not have to do anything this year. Wow, what a change!

The other bombshell yesterday was the FOMC’s new policy on the rate of unwinding its huge balance sheet. On this issue, the Fed introduced another new buzzword – “flexible”  on how fast it will continue to unwind its balance sheet.

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