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United States Monetary Policy January 2020

United States: Fed remains on hold at outset of 2020 and continues to signal steady policy ahead

At its 28–29 January monetary policy meeting, the Federal Reserve’s Open Market Committee (FOMC) unanimously voted to maintain its target range for the federal funds rate at 1.50%–1.75%, as had been expected by our panelists. Moreover, the Fed alluded to maintaining a steady monetary policy stance ahead as the economy continues to show resilience and inflation remains contained.

The Bank’s decision to stand pat at the outset of the year was largely driven by its favorable assessment of the economic panorama. The Fed continued to highlight the strong labor market, which has boded well for household spending. That said, the Bank commented on the persistent weakness in business investment and exports. Turning to inflation, the core personal consumption expenditure index—the Fed’s preferred inflation measure—has been tracking below the Bank’s 2.0% target (November: 1.6%). However, the FOMC expects it to return to target in the long run.

Fed Chair Powell also provided some guidance on the Fed’s outlook for its balance sheet expansion policies, which currently consist of purchases of USD 60 billion in Treasury bills every month and ongoing repo operations. In the subsequent press conference, Powell noted that the Fed would continue purchasing Treasury bills and conducting overnight repo operations over the first half of the year, but would adjust the size and pricing of repo operations gradually. The Bank foresees reserves reaching appropriate levels sometime in the second quarter, at which point it will slow the pace of asset purchases.

Turning to the outlook, the FOMC reaffirmed its confidence in its current stance and, in the conference, Powell stated: “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 Fed touched on receding external headwinds to growth, noting global growth appears to be stabilizing and uncertainty surrounding trade developments has waned somewhat. Consequently, the Fed would only likely shift its current monetary policy position on a significant change in the economic outlook and/or stronger-than-expected inflationary pressures.

Commenting on the January FOMC meeting, James Marple, senior economist at TD Economics, noted:

“Like other major central banks, the FOMC is in wait and see mode, assessing how the accommodation it has supplied to-date is working through the economy. There have been both positive and negative developments since the Fed last met in December. The phase one trade deal with China eliminates one source of uncertainty, but it is replaced by the spread of the coronavirus.”

The next FOMC meeting is scheduled for 17–18 March 2020.

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