The minutes of Federal Open Market Committee show the policymakers preparing to change tact on bond purchasing before begin to raise the target range for the federal funds rate - Photo by Federal Reserves Office

JAKARTA (TheInsiderStories) – United States’ (US) Federal Reserve (Fed) hold its federal funds rate (FFR) at 2.25 percent to 2.5 percent in June. The central bank also give a signal there is a window to cut the FFR later this year.

At the Federal Open Committee Meeting (FOMC), the board left its forecast for 2019 economic growth unchanged and  revised higher for 2020, according to the official statement released on Wednesday (06/19).

The Committee indicated that it could soon cut them as economic risks mounted and inflation remained stuck below target. A growing number of officials on the Fed’ policymaking committee expect to lower rates before the end of the year amid continuing trade tensions and slowing global economic growth.

The Fed chairman, Jerome Powell, said at a news conference after the Fed’ two-days meeting that officials were watching economic developments to gauge whether and when the action was warranted.

“The committee felt that the right thing to do was to wait and see more — and we will see a lot more on all of these issues in the very near term,” Powell said. He added that emerging risks “have caused a number of us to write down rate cuts, and a number of those who haven’t to say that the case has strengthened.”

The FOMC made a number of changes to its policy statement, removing the word “patient” in favor of language promising to “closely monitor the implications of incoming information for the economic outlook.”

The Fed said it still sees a “sustained expansion of economic activity, strong labor market conditions, and inflation near” the committee’s 2 percent target, but added that “uncertainties about this outlook have increased.”

Seven Fed’ officials have penciled in a decrease of 0.5 percentage points by the end of the year, while one official expects a 0.25-point move, based on the Committee’ summary of economic projections.

The president of the Federal Reserve Bank of St. Louis, James Bullard, dissented from the Fed’ decision to leave policy unchanged this month, arguing to start cutting. It was the first “no” vote during Powell’ 16-month tenure.

The Fed also released a fresh print of economic projections, which included new “dot plots” that map out policy setting members’ preferred rate paths through the next three years.

The median dot reflected no rate changes through the rest of 2019, and one 25-basis point rate cut in 2020. The previous dot plots in March (before trade tensions escalated and economic data softened) also had the median dot calling for no rate changes by the end of 2019 but projected a rate hike in 2020.

The new dot plots show Fed officials tilting closer toward a rate cut by the end of 2020. Nine members now see a case for up to two rate cuts in that same window of time. For comparison, the March dot plot reflected only seven members seeing a case for a rate cut by the end of 2020 — and none projected more than a single 25-basis point cut.

The June update shows some members still taking a hawkish stance. Three Fed officials see a case for at least one rate hike by the end of 2020, with one of those three officials predicting three rate hikes.

The economic projections also saw a tick down in future expectations for inflation. In March, the median Fed official projected the economy touching 2 percent on core personal consumption expenditures (the central bank’s preferred measure of inflation) by the end of 2019 and hitting that target again in 2020 and 2021.

The median Fed official now expects the central bank to miss its target for core PCE in 2019 and 2020, hitting 1.8 percent and 1.9 percent by the end of those years, respectively.

Inflation has been a conundrum for the Fed ever since it set its 2 percent symmetric inflation target in 2012. Since the Fed adopted that target, the central bank’s preferred measure for inflation – core personal consumption expenditures – have only touched or breached 2 percent once, raising the question of how the Fed can stimulate persistent undershooting of its target.

On the labor market front, the Fed said the labor market “remains strong,” despite a disappointing jobs report since the last policy-setting meeting in May.

That jobs report showed a sharp miss on expectations for added payrolls in addition to tepid wage growth pointing to a labor market that may be running below full employment.

Still, the Fed continues to bring down its expectations for the unemployment rate, suggesting that policy members continue to see room for more tightening in the labor market.

In the updated economic projections, the median Fed official projected a 3.6 percent unemployment rate by the end of 2019, a tick down from the March prediction of 3.7 percent. Fed officials appear to find this trend structural, as the median member also brought down the longer-run expectation for unemployment from 4.3 percent in March to 4.2 percent in the June projections.

“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,” the Committee said.

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, it adds. The Fed’ next policy-setting meeting will be July 30-31.

Written by Lexy Nantu, Email: