MNI REVIEW: Fed On Hold As Cuts Feed Through; Lowers Risk View

--Powell: Can Reassess Outlook, Fed Policy Course Is Not Pre-set

By Evan Ryser

     WASHINGTON (MNI) - Federal Reserve Chair Jay Powell said Wednesday the U.S.

central bank sees an improving outlook but he made clear the Fed is not sat on

the sidelines as it potentially stands pat throughout 2020, waiting to see the

"long and variable lags" of monetary policy.

     After cutting rates three times earlier in the year, the Federal Open

Market Committee kept its benchmark fed funds rate target range steady at 1.50%

to 1.75%, saying it judges the current stance of monetary policy as appropriate

to support a sustained expansion of economic activity, strong labor market

conditions, and inflation near the symmetric 2% objective.

     The so-called Dot Plot Wednesday show only 4 of 17 FOMC participants seeing

a hike in  2020, and fed funds rate medians of 1.6% in 2020, 1.9% in 2021, 2.1%

in 2022, and 2.5% over the longer run. 

     --RISKS

     Risks to the economic outlook, Powell said, have diminished, but remain

including weak business investment and exports. Powell said the outlook is a

favorable one. 

     The FOMC statement removed language indicating "uncertainties" but

maintained it will monitor the implications of incoming information for the

economic outlook, including global developments and muted inflation pressures.

     "Those are key things, and they haven't gone away," Powell said. "We

thought it was appropriate to mention them there. Still subject to the idea that

for us to change our stance, we would want to see a material reassessment of the

outlook."

     "We cut rates three times since July. That is 75 basis points worth of

cuts," Powell said. "It will take some time before the full effects of those

actions are seen in the economy. That will take some time. That is one reason to

hold back and wait."

     "If developments emerge that cause a material reassessment of our outlook,

we would respond accordingly," Powell said in his press conference opening

statement. "Policy is not on a pre-set course."

     -- FRAMEWORK REVIEW

     Powell indicated the Fed is not going to raise the inflation target at the

end of the ongoing framework review, but left the door open for potential future

Fed reviews.

     "The changes that we are looking at to the framework are ... to strengthen

the credibility of the inflation target, but only if followed by policy."

     Powell pushed back against the notion that a 4% inflation target would be

viewed by the public as credible when the Fed is already struggling to defend a

2% target. He further questioned the legality over a 4% inflation target and

whether it could really be called price stability.

     "These things don't tend to move in a lurchy way, they tend to evolve. But,

and if we do this, in a few years again and again ... at least we are moving in

a good direction and I think we will be," Powell said.

     Asked about the potential to allow inflation to overshoot the 2% target,

Powell said "I will say to you that a number of people wrote down overshoots of

inflation as appropriate, under appropriate policy."

     --REPO ISSUES

     Chair Powell kept the door open to the possibility of purchasing coupons

but maintained that the current plan to purchase Treasury bills seemed to be

working to quell pressures in the repo markets.

     Powell further indicated the Fed is considering regulatory and supervisory

adjustments to help ease the repo funding market, in addition to consideration

of a standing repo facility.

     "The standing repo facility is something that will take time to evaluate

and create the parameters of and put into place," Powell said.

     "We are more focused, frankly, on the bills purchases, the year end, and

also the review of supervisory and regulatory issues that we are digging into,"

Powell said, noting that some changes are structural and would consist of going

through a timely rulemaking processes.

     Chair Powell further commented on the Treasury General Account, a source of

volatility for reserves, saying the Fed is trying to keep it outside the talks

of potential changes. "We have taken it as exogenous."

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

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