Federal Open Market Committee (FOMC) may cut the Federal Fund Rate (FFR) in the March' meeting, said the analysts on Thursday (02/20) - Photo by Federal Reserves Office

JAKARTA (TheInsiderStories) – Federal Open Market Committee (FOMC) may cut the Federal Fund Rate (FFR) in the March’ meeting, said the analysts on Thursday (02/20). But the decision take if the coronavirus outbreak accelerates dramatically.

On Thursday, the Federal Reserve (Fed) left its benchmark short-rate unchanged again between 1.5 – 1.75 percent in January, but raise a special reserve rate it charges to banks (IOER) to 1.6 percent from initially 1.55 percent. The central bank reaffirmed its prior view that inflation is low and the economy is expanding at a “moderate rate.”

According to the chairman, Jerome Powell, the rate is designed to ensure the smooth functioning of financial markets. In the second quarter (2Q) of 2020, levels of reserves would “support slowing the pace of T-bill purchases”, said the board.

Full Statement on the Monetary Policy

In their discussion of monetary policy for this meeting, members noted that information received since the FOMC met in December indicated that the labor market remained strong and that economic activity had been rising at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low.

Although household spending had been rising at a moderate pace, business fixed investment and exports remained weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy were running below 2 percent.

Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed.

Members agreed to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. Members judged that the current stance of monetary policy was appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.

Members also agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.

And they concurred 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.

With regard to the post meeting statement, members agreed that incoming data warranted a change in the statement’s description of recent rises in household spending from “strong” to “moderate.” They also agreed to describe the current monetary policy stance as consistent with inflation “returning to,” rather than being “near,” their symmetric 2 percent longer-run objective.

In commenting on this change in wording, a few members noted that the new language would make the post meeting statement more consistent with the Committee’ outlook or might usefully affirm the symmetry of the Committee’ inflation goal and indicate that policymakers were not satisfied with inflation outcomes that were persistently below 2 percent.

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 SOMA in accordance with the following domestic policy directive

Effective Jan. 30, 2020, the FOMC directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-1/2 to 1-3/4 percent.

In light of recent and expected increases in the Federal Reserve’ non-reserve liabilities, the Committee directs the Desk to continue purchasing Treasury bills at least into the second quarter of 2020 to maintain over time ample reserve balances at or above the level that prevailed in early September 2019.

The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations at least through April 2020 to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation.

In addition, the Committee directs the Desk to conduct 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 1.50 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-counterparty limit of US$30 billion per day.

The Committee directs the Desk to continue rolling over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve’ holdings of agency debt and agency mortgage-backed securities received during each calendar month.

Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable.

The Committee 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.

Information received since the Federal Open Market Committee met in December indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.

Although household spending has been rising at a moderate pace, business fixed investment and exports remain weak. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent.

The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.

The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.

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. T

his 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.

by Linda Silaen, Email: linda.silaen@theinsiderstories.com