By Nick Timiraos
WASHINGTON -- The Federal Reserve held interest rates steady and
signaled no appetite to raise them soon.
After lowering rates at their three previous meetings to guard
the U.S. economy from the effects of trade tensions and a global
slowdown, Fed officials on Wednesday indicated comfort with leaving
monetary policy on hold through next year while keeping an eye on
those risks.
"Our economic outlook remains a favorable one," said Fed
Chairman Jerome Powell. The rate-setting committee voted 10-0 to
leave the central bank's benchmark rate in a range between 1.5% and
1.75%, the first unanimous vote since May.
New projections released after the meeting showed most officials
think rates are low enough to stimulate growth. If their favorable
outlook holds, most expect they could leave rates unchanged through
2020. In that scenario, most see the Fed raising rates once or
twice after that.
But Mr. Powell's remarks and language in the committee's
official policy statement indicated a lower threshold for the Fed
to cut rates again than to raise them.
Stocks rose after the Fed's announcement and Mr. Powell's press
conference. The S&P 500 closed up 0.3%, slightly higher than
before the Fed's announcement. The yield on the benchmark 10-year
Treasury declined to 1.786% from 1.833% on Tuesday.
Mr. Powell also said that the Fed's recent market interventions
to keep short-term rates stable are working but that the central
bank could do more if needed to address any end-of-year
strains.
"Our operations have gone well so far. Pressures in money
markets over recent weeks have been subdued," Mr. Powell said.
He added: "We stand ready to adjust the details of our
operations as necessary to keep the federal-funds rate in the
target range."
Fed officials lifted rates four times in 2018 and a year ago
expected to continue raising them this year because they
anticipated that strong economic momentum, including very low
unemployment, would push inflation higher.
Mr. Powell and his colleagues scrapped those plans early in 2019
when it became clear prices weren't rising as expected. Stocks had
tumbled and corporate bond issuance dropped late last year over
signs of a global growth swoon and investors' concern that higher
interest rates could trigger a recession.
That kicked off an introspective examination of the Fed's
guiding framework. Central to the Fed's thinking is how it
perceives progress in achieving its twin goals of maximum
employment and inflation near 2%. The jobless rate declined to 3.5%
in November from 10% in 2009, but the Fed's preferred measure of
inflation reached the central bank's 2% goal for only a few months
last year.
"As you can see, inflation is barely moving, notwithstanding
that employment is at 50-year lows -- and expected to remain
there," Mr. Powell said. "And so the need for rate increases is
less."
The Fed chairman has faced a difficult landscape this year that
included a public lashing from President Trump, who named him to a
four-year term that began in February 2018. Mr. Trump has made
clear his desire for lower interest rates to help boost exports by
weakening the dollar against other currencies.
The central bank has also been divided over the outlook for an
economy buffeted by rising trade tensions, a drop in business
investment and a global manufacturing slowdown. Officials began
weighing rate cuts in June and reduced their benchmark rate in July
when trade uncertainty damaged the growth outlook, fanned fears on
Wall Street of recession and raised worries of a more persistent
shortfall in inflation.
Rate cuts in July, September and October marked an especially
intense period for monetary policy and divided the 17 officials who
participate in policy deliberations. Some wanted to wait for more
evidence that a global manufacturing downturn was infecting the
broader U.S. economy, which has been buoyed by solid consumer
spending.
Others feared that because they had less room to cut interest
rates if the economy weakened, they should act sooner than in past
periods. Also, data revisions this year suggested the economy
wasn't as strong as officials had thought last year, when they were
raising rates.
On Wednesday, Mr. Powell signaled satisfaction with those moves
and played down any sense of urgency about reversing them soon. "I
would want to see a...significant move up in inflation that's also
persistent before raising rates to address inflation," he said.
Mr. Powell has faced criticism for uneven performances at some
news conferences, which he started holding after every meeting this
year -- twice as frequently as his predecessors. On Wednesday, Mr.
Powell "projected more confidence than at any presser before," said
former Dallas Fed President Richard Fisher. "He is visibly in
command of the ship."
The Fed is in the middle of a year-long review of its
inflation-targeting strategy, and Mr. Powell's remarks illustrated
how that process could already be influencing his leadership of the
committee.
Currently, the Fed seeks to keep inflation at around 2%, which
it regards as a sign of healthy growth. But inflation has mostly
held under the target since it was adopted eight years ago,
prompting Mr. Powell to push his colleagues to consider new
strategies.
In his opening remarks Wednesday, Mr. Powell began laying out a
public case for regarding too little inflation as a problem though
central banks have traditionally focused on preventing too much of
it
"Inflation that runs persistently below our objective can lead
to an unhealthy dynamic" in which households expect lower
inflation, leading to lower actual inflation. This could make it
harder for the Fed to lower interest rates to stimulate growth in a
downturn, he said, "resulting in worse economic outcomes for
American families and businesses."
The strategy review could already be influencing how officials
are thinking about setting policy. Officials are debating whether
to encourage periods of inflation above 2% to compensate for past
misses, and Mr. Powell said several officials penciled in a modest
overshoot of the 2% inflation target as appropriate policy in the
projections released Wednesday.
When pressed, Mr. Powell said the Fed might need to take action
if inflation held persistently below 2%. "Just saying words is not
itself credible," he said.
The comments suggested that low inflation, if it persists, could
prompt the Fed to cut interest rates sometime next year, said Diane
Swonk, chief economist at the accounting firm Grant Thornton. "If
you believe what he said up there, you need to cut" if inflation
remains low, she said.
The Fed has also made a major U-turn this year on its $4
trillion asset portfolio. Officials stopped shrinking their
holdings in July and later concluded that a spike in money-market
rates in mid-September was evidence they had allowed bank deposits
held at the Fed, called reserves, to fall too low.
To add reserves back into the banking system, the Fed began
buying $60 billion in short-term Treasury bills in October. They
have also scaled up daily and weekly lending operations to flood
the financial system with liquidity ahead of another anticipated
cash crunch at the end of the year.
Mr. Powell held open the prospect Wednesday that the Fed could
purchase slightly longer-dated Treasury securities if needed to
keep markets functioning around these deadlines.
Some big banks could have incentives to scale back lending in
money markets to slim down their balance sheets and avoid potential
higher capital charges. Meanwhile, rising budget deficits have left
bond dealers with more government bonds to sell and less spare
capacity, as a result, to lend in money markets.
This has raised questions over whether the Fed's interventions,
which arrested market volatility in mid-September, will be as
effective over the end of the year. "The reality is they don't
know, and they know they don't know," said Scott Minerd, chief
investment officer at money manager Guggenheim Partners LLC.
--Michael S. Derby contributed to this article.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
December 11, 2019 18:49 ET (23:49 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.