SINGAPORE (Dec 13): The US Federal Reserve has signalled that it will keep rates unchanged, which indicates borrowing costs in the country will remain at status quo even as it heads into next year’s presidential election with moderate economic growth and low unemployment. The move comes after the central bank’s previous rate cuts for this year, meant to protect the US from ongoing trade tensions and a global economic slowdown.
“[The US’] economic outlook remains a favourable one despite global developments and ongoing risks,” Fed chairman Jerome Powell pointed out at a press conference in Washington, DC following the Fed’s open market committee meeting on Dec 11. In the first unanimous vote since May by the 17-member committee, the benchmark lending rate was left unchanged at its current target range of between 1.5% and 1.75%.
Powell believed the current stance of monetary policy remains appropriate “as long as incoming information about the economy remains broadly consistent with [the current] outlook”. “Our operations have gone well so far [and] pressures in money markets over recent weeks have been subdued,” he said.
US stocks reacted immediately to the announcement, with the Standard and Poor’s 500 Index closing 0.3% higher that day. Meanwhile, the yield on the benchmark 10-year Treasury note declined to 1.786%, from 1.833% the day earlier.
To this end, Powell said the committee might consider widening reserve management-related treasury purchases to include short-term coupon-bearing securities to ease market liquidity. This is especially to address any unforeseen end-of-year strain that may arise. “We stand ready to adjust the details of our operations as necessary to keep the federal funds rate in the target range,” he shared.
Market watchers question move
The committee’s decision took some economists by surprise, as market watchers had anticipated another rate cut as the US prepares for the first phase of trade talks with China on Dec 15. “To me, it seems like forward guidance; the Fed is only capable of making a forecast based on present-day macro data,” Robert Carnell, chief economist for AsiaPacific at ING Bank, tells The Edge Singapore.
“With labour market data that is choppy and an economy that is fluctuating, their decision [to keep rates unchanged for a year] gives a false sense of specialist insider information. The Fed should stop speaking and start listening to what’s happening on the ground,” says Carnell.
However, the decision did not surprise analysts such as Kerry Craig, JP Morgan Asset Management’s global market strategist. “As expected, there were no fireworks from the Fed today,” he states in a report, adding that the move comes on the back of “a still rosy view of the labour market [and] the inflation outlook or the lack of it”. To this end, he cautions on the efficacy of the decision, given the external pressures, as well as a falling unemployment rate that is not improving growth or inflation. “A sizeable turn in the economic and inflation outlook in either direction will be required for markets to contemplate any sort of move in interest rates,” he says.
2019’s rate cuts explained
The Fed’s decisions for this took aback market watchers, who had anticipated strong economic momentum, low unemployment and a resultant increase in inflation to tip rates upwards. This was also buoyed by expectations of the four rate hikes in both 2017 and 2018 to continue this year.
However, tumbling stock prices and corporate bond issuances last year indicated that higher interest rates could, in fact, backfire and result in a recession. And so, Powell and his team prioritised getting inflation to near 2%. They did quite well, as US annual inflation rate rose to 2.1% in November, from 1.8% in the previous month. Meanwhile, unemployment came in at 3.5% in November — the lowest since 1969.
“As you can see, inflation is barely moving, notwithstanding unemployment at 50year lows, and is expected to remain there,” noted Powell, adding that the “need for rate increases is [thus] less”.
