MNI REVIEW: Fed Holds Rate and Sees USD1.5T Reserves Floor

--Powell Tweaks Statement to Stress Inflation Goal Is 2%, Not Near It

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Chair Jay Powell held a key interest

rate unchanged for a second straight meeting Wednesday as the U.S. economy looks

set for another year of solid jobs growth and steady if lower-than-desired

inflation.

     Powell's main shift was on money markets and the Fed's policy framework

review, revealing new details about targets for bank reserves and repo

interventions.

     Reserves must be at least USD1.5 trillion and move in a range

"substantially higher than that" to ensure well functioning money markets and

the smooth transmission of monetary policy, he told reporters at the conclusion

of the FOMC meeting. The Fed anticipates extending its USD60 billion per month

of Treasury bill purchases and frequent open market operations at least through

April, Powell said. 

     The Fed also made a 5bp increase to interest paid on required and excess

reserves, a "technical" move that should keep the fed funds rate trading within

the FOMC's target range, he said in Washington. Powell rejected questions asking

if the extra cash in the system was a soft form of QE. "Our intention of these,

or for these adjustments is just to raise the level of reserves and to allow us

to conduct monetary policy in an efficient and effective manner and that is our

sole intention," he said. 

     As the Fed winds down repo operations closer to that date, Powell pledged

that the transition to a program of "smaller reserve management purchases" will

take place gradually. "We will know it when we get there. We'll know it because

we'll be able to control the federal funds rate without active use, ongoing use

of open market operations," Powell said. 

     Treasury yields fell to session lows and the U.S. dollar fell following the

Fed's commitment to stock the system with ample reserves. 

     --RETURN TO 2% TARGET

     Also driving the bond rally was the Fed's signal that it is not comfortable

with inflation persistently under 2%. One notable change out of Wednesday's

meeting is new language saying Fed policy supports inflation "returning to" the

symmetric 2% target, not merely "near" that target, with Powell saying the

change fixes a possible misinterpretation.

     "We're not satisfied with inflation running below 2%, particularly at a

time such as now where we're a long way into an expansion and a long way into a

period of very low unemployment when in theory where inflation should be moving

up," he said.

     The FOMC is just starting to pull together its decision making on whether

to change the way it targets inflation, Powell said, with results anticipated by

mid-2020. Many analysts expect the Fed to shift its target toward average

inflation over a period of time rather than at any given point in time. 

     Powell signaled Wednesday that the Fed is on hold while continuing to watch

downside risks. Many investors before and after the meeting see the Fed on hold

through 2020 with trade risks easing after a Phase One deal with China and

ratification of USMCA. 

     "Some of the uncertainties around the trade have diminished recently, and

there are some signs that global growth may be stabilizing after declining since

mid-2018," Powell said. "Nonetheless, uncertainty about the outlook remain,

including those posed by the new coronavirus" in China.  

     It's still "too early to say what the effects will be" of the Chinese

outbreak on the global economy, but the Fed is monitoring carefully, Powell

added. 

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

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