The Fed's policy-making body, the Federal Open Market Committee (FOMC), reiterated its description of business fixed investments and exports as still weak and inflation continuing to run below the 2.0 percent target.
Countering that weakness the FOMC said the labor market remains strong and economic activity has been rising at a moderate rate.
As in December, the FOMC was unanimous in its decision.
Early last year the Fed carried out a sharp U-turn when it reacted to weakness in the global economy and then cut the fed funds rate three times by a total of 75 basis points, ending in October.
In December the Fed then kept its rate steady and signaled it would keep rates on hold for a while, and it would take a "persistent" and "significant" rise in inflation before it considers any rate hike.
The Fed today reiterated it considers the current policy stance as "appropriate" to support sustained expansion of economic activity and strong labor market conditions and "inflation returning the Committee's symmetric 2 percent objective."
Today's reference to getting inflation to return to 2 percent is slightly different to its December statement when it said the current policy stance was appropriate to support inflation "near" the 2 percent objective.
This reflects the recent uptick in headline inflation to 2.3 percent in December and 2.1 percent in November due to higher energy costs.
As in December, the FOM said it would continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures.
In December the trimmed its forecast for the fed funds rate this year to average 1.6 percent from an earlier 1.9 percent, rising to 1.9 percent in 2021 and 2.1 percent in 2022.
In a separate statement on the implementation of its monetary policy, the FOMC raised its interest rate on excess reserves by 5 basis points to 1.60 percent, or 10 points above the bottom of its target range for fed funds, "to foster trading in the federal funds market at rates well within the FOMC's target range."
The Fed also said it term and overnight repo operations, which it began in October following a spike in money market rates, would continue "at least through April" to ensure the supply of reserves remains ample and mitigate the risk that pressures in money markets affect policy implementation.
The Fed said it would be conducting overnight reverse repurchase operations, and reverse repo operations with maturities of more than one day, at a rate of 1.50 percent in amounts only limited by the value of Treasury securities available for such operations and by a per-counterparty limit of $30 billion per day."
It added that principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in mortgage-backed securities and it would continue to roll over all principal payments from its holdings of Treasury securities.
The Board of Governors of the Federal Reserve System released the following statement, followed by another statement about the implementation of monetary policy and Chair Jerome Powell's opening remarks to a press conference:
"Information received since the Federal Open Market Committee met in December indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a moderate pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1‑1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles."
"Decisions Regarding Monetary Policy Implementation
The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on January 29, 2020:
- The Board of Governors of the Federal Reserve System voted unanimously to set the interest rate paid on required and excess reserve balances at 1.60 percent, effective January 30, 2020. Setting the interest rate paid on required and excess reserve balances 10 basis points above the bottom of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the FOMC's target range.
- As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:"Effective January 30, 2020, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/2 to 1-3/4 percent. In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Committee directs the Desk to continue purchasing Treasury bills at least into the second quarter of 2020 to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations at least through April 2020 to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.50 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.The Committee directs the Desk to continue rolling over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable.The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."
- In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 2.25 percent.
This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve's operational tools and approach used to implement monetary policy.
More information regarding open market operations and reinvestments may be found on the Federal Reserve Bank of New York's website."
Transcript of Chair Powell’s Press Conference Opening Remarks January 29, 2020
CHAIR POWELL. Good afternoon everyone. Thanks for being here. At today’s meeting, my colleagues and I decided to leave our policy rate unchanged. As always, we base our decisions on our judgment of how best to achieve the goals Congress has given us— maximum employment and price stability. We believe monetary policy is well positioned to serve the American people by supporting continued economic growth, a strong job market, and a return of inflation to our symmetric 2 percent goal.
The expansion is in its 11th year, the longest on record. Growth in household spending moderated toward the end of last year, but with a healthy job market, rising incomes, and upbeat consumer confidence, the fundamentals supporting household spending are solid. In contrast, business investment and exports remain weak, and manufacturing output has declined over the past year. Sluggish growth abroad and trade developments have been weighing on activity in these sectors. However, some of the uncertainties around trade have diminished recently, and there are some signs that global growth may be stabilizing after declining since mid-2018. Nonetheless, uncertainties about the outlook remain, including those posed by the new coronavirus. Overall, with monetary and financial conditions supportive, we expect moderate economic growth to continue.
The unemployment rate has been near half-century lows for well more than a year, and the pace of job gains remains solid. Participation in the labor force by people in their prime working years, ages 25 to 54, is at its highest level in more than a decade. And wages have been rising, particularly for lower-paying jobs. People who live and work in middle-income communities and low-income communities tell us that many who have struggled to find work are now finding new opportunities. Employment gains have been broad based across all racial and ethnic groups and all levels of education. These developments underscore for us the importance of sustaining the expansion so that the strong job market reaches more of those left behind.
CHAIR POWELL. Good afternoon everyone. Thanks for being here. At today’s meeting, my colleagues and I decided to leave our policy rate unchanged. As always, we base our decisions on our judgment of how best to achieve the goals Congress has given us— maximum employment and price stability. We believe monetary policy is well positioned to serve the American people by supporting continued economic growth, a strong job market, and a return of inflation to our symmetric 2 percent goal.
The expansion is in its 11th year, the longest on record. Growth in household spending moderated toward the end of last year, but with a healthy job market, rising incomes, and upbeat consumer confidence, the fundamentals supporting household spending are solid. In contrast, business investment and exports remain weak, and manufacturing output has declined over the past year. Sluggish growth abroad and trade developments have been weighing on activity in these sectors. However, some of the uncertainties around trade have diminished recently, and there are some signs that global growth may be stabilizing after declining since mid-2018. Nonetheless, uncertainties about the outlook remain, including those posed by the new coronavirus. Overall, with monetary and financial conditions supportive, we expect moderate economic growth to continue.
The unemployment rate has been near half-century lows for well more than a year, and the pace of job gains remains solid. Participation in the labor force by people in their prime working years, ages 25 to 54, is at its highest level in more than a decade. And wages have been rising, particularly for lower-paying jobs. People who live and work in middle-income communities and low-income communities tell us that many who have struggled to find work are now finding new opportunities. Employment gains have been broad based across all racial and ethnic groups and all levels of education. These developments underscore for us the importance of sustaining the expansion so that the strong job market reaches more of those left behind.
Inflation continues to run below our symmetric 2 percent objective. Over the 12 months through November, total PCE (personal consumption expenditures) inflation was 1.5 percent, and core inflation, which excludes volatile food and energy prices, was 1.6 percent. Available data suggest similar inflation readings for December, though we expect inflation to move closer to 2 percent over the next few months as unusually low readings from early 2019 drop out of the calculation. While low and stable inflation is certainly a good thing, inflation that runs persistently below our objective can lead longer-term inflation expectations to drift down, pulling actual inflation even lower. In turn, interest rates would be lower as well—closer to their effective lower bound. As a result, we would have less room to reduce interest rates to support the economy in a future downturn, to the detriment of American families and businesses. We have seen this dynamic play out in other economies around the world, and we are determined to avoid it here in the United States.
In particular, we believe the current stance of monetary policy is appropriate to support sustained economic growth, a strong labor market, and inflation returning to our symmetric
2 percent objective. As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy will likely remain appropriate. We will be monitoring the effects of the policy actions we took last year, along with other information bearing on the outlook, as we assess the appropriate path of the target range for the federal funds rate. Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a preset course.
In particular, we believe the current stance of monetary policy is appropriate to support sustained economic growth, a strong labor market, and inflation returning to our symmetric
2 percent objective. As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy will likely remain appropriate. We will be monitoring the effects of the policy actions we took last year, along with other information bearing on the outlook, as we assess the appropriate path of the target range for the federal funds rate. Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a preset course.
I will conclude with a brief overview of our current plans for our technical operations to implement monetary policy. The plan the FOMC announced back in October to purchase Treasury bills and conduct repo operations has proceeded smoothly and has succeeded in providing an ample supply of reserves to the banking system and effectively controlling the federal funds rate. In light of the resulting stability in the federal funds rate and money market conditions more generally, we decided to make a small technical upward adjustment to administered rates to ensure that the federal funds rate trades well within the target range. This action reverses the small downward adjustment made in September when money markets were volatile.
As our bill purchases continue to build reserves toward levels that maintain ample conditions, the role played by active repo operations will naturally recede. Over the first half of this year, we intend to adjust the size and pricing of repo operations as we transition away from their active use in supplying reserves. This process will take place gradually and, as indicated in today’s FOMC Directive to the Desk, we expect to continue offering repos at least through April to ensure a consistently ample supply of reserves. Based on current projections, we expect that the underlying level of reserves will durably reach ample levels sometime in the second quarter of this year. As we get close to that point, we intend to slow the pace of purchases and transition to a program of smaller reserve-management purchases that maintains an ample level of reserves without the active use of repos. At that point, as in the pre-crisis period, our balance sheet will be expanding gradually over time, reflecting the trend growth in the demand for currency and other Federal Reserve liabilities.
All of these technical measures are designed to support the efficient and effective implementation of monetary policy and are not intended to represent a change in the stance of monetary policy. We are committed to completing the transition to our longer-run ample reserves regime smoothly and predictably. Of course, we will continue to closely monitor conditions in money markets and we will adjust these plans as conditions warrant.
As our bill purchases continue to build reserves toward levels that maintain ample conditions, the role played by active repo operations will naturally recede. Over the first half of this year, we intend to adjust the size and pricing of repo operations as we transition away from their active use in supplying reserves. This process will take place gradually and, as indicated in today’s FOMC Directive to the Desk, we expect to continue offering repos at least through April to ensure a consistently ample supply of reserves. Based on current projections, we expect that the underlying level of reserves will durably reach ample levels sometime in the second quarter of this year. As we get close to that point, we intend to slow the pace of purchases and transition to a program of smaller reserve-management purchases that maintains an ample level of reserves without the active use of repos. At that point, as in the pre-crisis period, our balance sheet will be expanding gradually over time, reflecting the trend growth in the demand for currency and other Federal Reserve liabilities.
All of these technical measures are designed to support the efficient and effective implementation of monetary policy and are not intended to represent a change in the stance of monetary policy. We are committed to completing the transition to our longer-run ample reserves regime smoothly and predictably. Of course, we will continue to closely monitor conditions in money markets and we will adjust these plans as conditions warrant.
Thank you, and I will be happy to take your questions."
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