MNI POST-FOMC: Fed Hits Pause, Moves to Neutral Rates Stance

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve on Wednesday held rates steady and

signaled it has moved into a neutral stance on further interest rate

adjustments, citing muted inflation and ebbing global growth as reasons to stay

patient for the time being. 

     "The case for raising rates has weakened somewhat," Fed Chair Jay Powell

told reporters after the January FOMC meeting. "It's going to depend entirely on

the data. We are not making a judgment. We don't have a strong prior. We'll

patiently wait and let the data clarify."

     Even as U.S. economic growth looks solid, data suggest the slowdown in

China and Europe remains a near term risk. Uncertainty over the outcomes of

U.S.-China trade negotiations and Britain's exit from the EU, as well as the

ultimate impact of January's U.S. government shutdown, have yet to clear up,

Powell noted. 

     "I would want to see a need for further rate increases. And for me, a big

part of that would be inflation," he said.  

     Meanwhile, the Fed moved closer to endorsing a larger longer-run balance

sheet. At the conclusion of Wednesday's meeting, the FOMC made a formal

commitment to keep the abundant reserves operating framework it adopted after

the financial crisis and said rising reserves demand by financial institutions

implies that its runoff program will be "completed sooner," leaving it with a

"larger balance sheet than in previous estimates."

     --LESS FORWARD GUIDANCE

     The FOMC on Wednesday abandoned statement language that "further gradual

increases" in rates would be consistent with economic objectives and made no

official assessment of the balance of risks in a bid to convey a more flexible,

data dependent approach. 

     In his press conference, Powell sought to underline the shift. He declined

to opine over how long the Fed intends to remain patient or whether Fed policy

remains accommodative, saying only that the length of the pause will only be

known in hindsight. 

     "Our policy rate is now in the range of the committee's estimates of

neutral, and we think our policy stance is appropriate," he said.  

     The risk of too high inflation "appears to have diminished" over the past

few months, he said, noting that core inflation remains near 2% but financial

market measures of inflation compensation have moved lower.  

     At the same time, financial conditions tightened significantly in the

fourth quarter and have stayed tight, effectively raising the bar for raising

rates further. 

     --LARGER BALANCE SHEET

     The FOMC on Wednesday reiterated that adjusting the size of its bond

holdings is not an active policy tool but left open the possibility of

occasional changes to its balance sheet plan, including tapering current monthly

runoff caps. 

     While the fed funds rate remains its primary means of adjusting policy, "we

will not hesitate to make changes (to balance sheet normalization) in light of

economic and financial developments," Powell said. "This does not mean that we

would use the balance sheet as an active tool, but occasional changes could be

warranted." 

     He also hinted that the FOMC was arriving at a larger longer run size for

its balance sheet after accounting for rising bank demand for reserves plus a

buffer to prevent the need for frequent, sizable market interventions. 

     The committee intends to finalize "a plan for gradually reaching our

ultimate balance sheet goals" at upcoming meetings, he said. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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