JAKARTA (TheInsiderStories) – United States’ Federal Open Meeting Committee (FOMC) maintained its federal funds rates at 2.25 – 2.5 percent at the latest statement released on Wednesday (07/10). At the same time, the chairman Jerome Powell send a signal to could soon cut the rate in this year.
In the hearing with the US’ House Financial Services Committee, he promised to “be patient” in adjusting interest rates and hinting at a possible cut rate as much as half a percentage point later this year.
In their discussion in June 18 – 19, the Board noted the significant increase in risks and uncertainties attending the economic outlook. It said, there were signs of weakness in US business spending, and foreign economic data were generally disappointing, raising concerns about the strength of global economic growth.
While strong labor markets and rising incomes continued to support the outlook for consumer spending, uncertainties and risks regarding the global outlook appeared to be contributing to a deterioration in risk sentiment in financial markets and a decline in business confidence that pointed to a weaker outlook for business investment in the US.
Furthermore, FOMC rated the inflation pressures remained muted and some readings on inflation expectations were at low levels.
“Although nearly all members agreed to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent at this meeting, they generally agreed that risks and uncertainties surrounding the economic outlook had intensified and many judged that additional policy accommodation would be warranted if they continued to weigh on the economic outlook,” said the board in a written statement.
However, at the meeting one member preferred to lower the target range for the federal funds rate (FFR) by 25 basis points at this meeting, stating that the committee should ease policy at this meeting to re-center inflation and inflation expectations at the Committee’s symmetric 2 percent objective.
Members agreed that in determining the timing and size of future adjustments to the target range for the FFR, the committee would assess realized and expected economic conditions relative to the committee’ maximum-employment and symmetric 2 percent inflation objectives.
They reiterated that this assessment would 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. More generally, members noted that decisions regarding near-term adjustments of the stance of monetary policy would appropriately remain dependent on the implications of incoming information for the economic outlook.
With regard to the post meeting statement, members agreed to several adjustments in the description of the economic situation, including a revision in the description of market-based measures of inflation compensation to recognize the recent fall in inflation compensation.
At the conclusion of the discussion, the Committee voted to authorize and direct 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 June 20, the FOMC directs the desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 2-1/4 to 2-1/2 percent, including 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 2.25 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-counter party limit of $30 billion per day,” said the board.
The Committee directs the desk to continue rolling over at auction the amount of principal payments from the Fed’ holdings of Treasury securities maturing during each calendar month that exceeds $15 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Fed’ holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion.
Board of FOMC 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.”
Previously, the Fed issued a final rule that reduces the regulatory burden by simplifying several requirements in the in the agencies’ regulatory capital rules. This rule will come into force from April 1, 2020 and on Oct. 1, 2019 for revisions to pre-approval requirements for redemption of ordinary shares and other technical amendments.
The central bank said, this regulation was more specifically made to simplify capital treatment for mortgage service assets, certain deferred tax assets, investments in capital instruments of unconsolidated financial institutions, and minority interests.
The simplification in the final rules only applies to banking organizations that do not use the “advanced approach” capital framework, which generally companies with consolidated total assets of less than US$250 billion and total foreign exposures of less than $10 billion.
Furthermore, this final rule is intended to simplify and clarify a number of more complex aspects of the existing regulatory capital regulations of the institution and will allow banks and savings and loan companies to redeem ordinary shares without prior approval unless asked otherwise.
The proposed revisions to the definition of exposure to commercial real estate for high volatility, which are made in the proposed regulatory notices, are being discussed in separate regulation making, it said.
Regulators viewed, the latest rules are consistent with reports on economic growth and the document reduction regulations issued by institutions in 2017. In the report, the agency is committed to significantly reducing the regulatory burden, especially in community banking organizations, while at the same time maintaining safety and health and quality and quantity of regulatory capital in the banking system.
Since 2009, large banks have added more than $800 billion in common equity capital, giving them a much thicker cushion to deal with losses. Banks have gotten much better at assessing and managing their risks, effectively tracking commitments across their organizations, anticipating capital needs, and planning for different scenarios.
As financial institutions and financial systems develop, stress-testing needs to be improved, 5 or 10 years into the future. When financial instability arises, it may occur in a messy and unexpected way.
Therefore, Powell admitted, the central bank needs to be prepared not only for the expected risks, but for unexpected risks. As such, tests must vary from year to year, and to explore even highly unlikely scenarios.
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