JAKARTA (TheInsiderStories) – The United States (US) Federal Reserve (Fed) left the target range for its federal funds rate unchanged at 1.5-1.75 percent at their January meeting on Wednesday (01/29), saying the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the 2 percent objective.
However, the interest on excess reserves rate (IOER) was raised by 5 basis points to 1.6 percent, aiming to foster trading in the federal funds market at rates well within the central bank’s Federal Open Market Committee (FOMC) target range. The IOER is usually seen as a guardrail for the funds rate, according to the Fed minutes.
The first monetary policy decision from the Fed in 2020 suggests that no changes in the funds rate should be expected during this year, in line with FOMC projections made in December. The Fed also said that overnight repo operations will continue at least through April 2020 to ensure that the supply of reserves remains ample. The four new voting members (from the Philadelphia, Cleveland, Minneapolis, and Dallas Feds) supported the unanimous decision.
But the Fed downgraded its assessment of household spending, originally describing consumption by the US consumer as “strong” in December, but now characterizing activity as “moderate.” The Fed also made a technical change by saying it would raise the interest it pays on reserves and excess reserves from 1.55 percent to 1.60 percent.
The Fed made a similar tweak in May when it adjusted the interest on excess reserves down from 2.40 percent to 2.35 percent. At the time the Fed was targeting rates between 2.25 percent to 2.5 percent.
President Donald Trump tweeted this week that he would like the Fed to lower rates further so that the US government can refinance its debt. Trump took his biggest swipe yet at the Fed, saying that his economic achievements, which have helped the US remain “by far the strongest economic power in the world,” came despite the central bank’s policies holding back the US economy.
In recent months, Fed officials have expressed concern over the inability to get inflation to the 2 percent level. While consumers welcome low prices, the Fed worries that low expectations will continue to keep inflation and, consequently, interest rates at below-normal levels, thus providing little flexibility to cut during future downturns.
Officials hope they can jawbone inflation higher by committing to keeping rates low until the inflation level rises. They even have indicated, through the “symmetric” terminology, that they will allow inflation to run above target for a while.
“We wanted to underscore our commitment to 2 percent not being a ceiling, to inflation running symmetrically around 2 percent and we’re not satisfied with inflation running below 2 percent,” Fed Chairman Jerome Powell said during his post-meeting news conference.
Powell said the change to the statement came following discussions at December’s meeting when some members through “near” was a concession to sub-2 percent inflation.
Powell also expressed some concern about Chinese coronavirus that may disrupt economic growth in East Asia and global, which has drawn comparisons to a 2002-’03 outbreak of SARS and has claimed more than 130 lives and infected more than 6,000 people worldwide in a little over a week.
“It’s a serious issue. There is likely to be some disruption of activity in China and possibly globally based on the spread of the virus today and the travel restrictions and business closures that have already been imposed. We’ll just have to wait to see what the effect is global, he said.
Written by Lexy Nantu, Email: firstname.lastname@example.org