Fed to be "patient" with rate changes

Jermaine Castillo
February 1, 2019

Worries that the Fed would raise rates swiftly had spooked markets late past year.

"The case for raising rates has decreased somewhat", Fed chairman Jerome Powell said at a news conference following the rate announcement. "It wouldn't be the only thing, but it would certainly be important".

Powell, speaking to reporters after the end of the Fed's latest two-day policy meeting, said the central bank would likely stop trimming its $4.1 trillion balance sheet sooner, leaving it with more assets than previously expected.

At 2:18 pm in NY, the Dow Jones Industrial Average was down 0.22 per cent at 24,958.58 points, while the S&P 500 had gained 0.72 per cent to 2,700.5. Benchmark U.S. Treasury yields, which tend to set the bar for global borrowing costs, had dived significantly and Europe's big move saw Italian 2-year yields hit their lowest since May.

The 10-0 vote on the decision held the target range for the federal funds rate at 2.25 per cent to 2.5 per cent. Before the financial crisis hit in 2008 it had reached 5.25 percent.

The Fed said it would retain an "ample" supply of reserves and could adjust the pace of the sell-off if the economy deteriorates.

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The slight downgrade in the Fed's language around rate increases included a change in its description of economic growth from "strong" to "solid", and it noted that market-based measures of inflation compensation have "moved lower in recent months".

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability". On Wednesday, there was no mention of tightening.

Read: We're good for now.

The FOMC increased the benchmark rate four times past year but rising concerns about a slowing USA economy, amid a trade war with China, prompted officials to signal they will take time to gauge the economy's performance.

Following the Fed statement, TD Securities has now changed its Fed forecast, TD's senior FX strategist, Mazen Issa, said.

"We are now facing a somewhat contradictory picture of generally strong USA macroeconomic performance, alongside growing evidence of cross-currents", Powell told reporters.

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Now, the next cue for markets could stem from the outcome of trade talks later Thursday between China and the US.

"At such times, common-sense risk management suggests patiently awaiting greater clarity, an approach that has served policymakers well in the past", he said.

Some analysts take the Fed's latest comments to mean that the body will not raise rates in March either.

The MSCI world equity index, which tracks share performance in 47 countries, rose 1.2 percent following gains in Asia overnight.

The Nasdaq Composite added 1.31 per cent to 7,277.26.

It may not be long before that record is broken. Facebook shares then leapt 11 percent after hours after it had reported better-than-expected profits following a year of high profile data scandals.

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