Economic Flash

FOMC Keeps Rate Unchanged but Downgrades Assessment of Consumer

by Craig Dismuke, Dudley Carter

In its first policy decision of 2020, the FOMC voted unanimously to keep its overnight target range unchanged at 1.50-1.75% but elected to raise its interest on excess reserves rate 0.05% to 1.60%.  The increase in the IOER appears to be mechanical in nature as the Fed tries to manage the effective overnight rate closer to the mid-point of its target range.  Also mechanical in nature, they raised their repo rate from 1.45% to 1.50%.  To ensure ample liquidity in the overnight funding market, they extended their overnight repo operations “at least through April.”  The temporary fix to last September’s liquidity crunch was set to expire at the end of January.

As expected, there were very few changes to the Official Statement.  In fact, only three words were changed.  However, the changes reflect a slightly more dovish perspective from FOMC participants.  Specifically, the assessment of household spending was downgraded from “rising at a strong pace” to “rising at a moderate pace.”  While this was the only change to the overall economic assessment, it is a noteworthy change, downgrading the most stable area of strength for the economy.  Participants continue to see the labor market as “solid,” and continue to see business investment and exports as “weak.” Overall, the economic assessment without the “strong” household spending characterization is disappointing.

As it relates to inflation, the Statement notes that policy is set to support inflation “returning” to their 2% target.  In their previous Statement (December), the noted that policy was supporting keeping inflation “near” their target.

Bottom line: The minimal, albeit dovish, tweaks to the Official Statement reflect a Fed effectively buying time to allow for more incoming data to inform any additional response to soft inflation, modest U.S. economic activity, and global uncertainties.

Fed Chair Powell will host a press conference at 1:30 p.m. CT.


FOMC Official Statement

January 29, 2020

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.

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