Eric Espeseth, Principal Credit Analyst
As widely expected, the Federal Open Market Committee (FOMC) left policy rates unchanged at the January 29th meeting. This marks the second consecutive meeting where the federal funds target range was unchanged and follows three previous rate cuts during the second half of last year.
Key details from the FOMC's January 29th meeting:
- The federal funds target range was left unchanged at 1.50% to 1.75%
- The interest rate paid on excess reserves (IOER) and overnight reverse repos were increased five basis points to 1.60% and 1.50%, respectively, in a technical move designed to push the federal funds rate closer to the center of the designated target range.
- The FOMC voted unanimously for the policy actions; while not surprising, the composition of FOMC voters has shifted somewhat more dovish this year.
- Monthly, the Federal Reserve (Fed) will continue to purchase $60B in T-Bills with remaining maturities of four weeks to one year at least into the second quarter of 2020.
- The Fed will also continue providing overnight and term repo operations through at least April 2020; previously stated operations would last through January 2020.
The expectation coming into this meeting was for an uneventful one and the FOMC certainly did not disappoint. The firm message is that the Fed remains on hold, continuing to view the current stance of monetary policy as appropriate to support economic expansion. This meeting's statement was virtually identical to the prior statement. In fact, only two words were changed from the December statement with household spending described as rising at a "moderate" pace compared to "strong" and monetary policy supporting inflation "returning to" compared to "near" the symmetric 2% objective. On the inflation point, Fed Chairman Powell stated the change in language was meant as "a clearer signal" that the committee is not satisfied with inflation persistently running below its 2% objective and that the objective is not a ceiling.
We expect the Fed to maintain current policy rates through 2020. Domestic fundamentals remain generally solid with strong labor market and constructive consumer spending conditions. Financial conditions are more accommodative following three interest rate cuts in 2019, further supporting economic growth. Global growth headwinds have also subsided following the signing of the Phase One trade agreement between the U.S. and China, as well as further monetary stimulus from global central banks. Weak business spending and capital investment, coupled with stubbornly low inflation and uncertainty surrounding the global economic impact of the Coronavirus present potential headwinds to the outlook.
Bottom Line: We see a high bar for policy rate moves over the near-term with risk to our outlook decidedly skewed toward further accommodation. We see virtually no risk of a 2020 rate hike.
Federal Reserve, FOMC Statement, January 29, 2020
Federal Reserve, FOMC Statement, projection materials and press conference, January 29, 2020
Federal Reserve Bank of New York, Statement Regarding Treasury Bill Purchases and Repurchase Operations, October 11, 2019
Federal Reserve Bank of New York, Statement Regarding Repurchase Operations, December 12, 2019