Economic Flash

Fed Nixes Future Hike Language, Open to Changing Balance Sheet Run-off


by Craig Dismuke, Dudley Carter

Fed Nixes Future Hike Language, Open to Changing Balance Sheet Run-off


The FOMC tilted notably dovish in the January policy decision, as expected, changing their forward rate guidance and putting the balance sheet normalization process on the table.

 

The Official Statement omitted “some further gradual increases” from the wording altogether and, instead, said that the Committee would “be patient as it determines what future adjustments … may be appropriate.”  Additionally, the Committee’s assessment that “risks to the economic outlook [were] roughly balanced” was stricken from the Statement. “Muted inflation pressures” and “global economic and financial developments” were cited for the change to a more patient posture.

 

As it relates to the balance sheet normalization, the Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization was amended to say that they are “prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.”

 

The markets were anticipating a dovish decision given recent market developments and the shift in tone from Fed officials.  By modifying the forward guidance for rates and putting changes to the balance sheet normalization process on the table, investors are likely to interpret this policy decision as sufficiently supportive.

 

The target range for federal funds remained unchanged at 2.25-2.50%.

 

The decision was unanimous.

 

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

 

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FOMC Official Statement

January 30, 2019

 

Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Although market-based measures of inflation compensation have moved lower in recent months, 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. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

 

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 FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.

 

Implementation Note issued January 30, 2019


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