FED HOLDS

Janet yellenWin McNamee/Getty ImagesFederal Reserve Board Chairwoman Janet Yellen.

The Federal Open Market Committee kept policy on hold on Wednesday.

Most Fed watchers expected the committee to keep rates on hold, arguing it would be keen to see more details from the Trump administration’s proposed fiscal policies before making a move.

Additionally, in the accompanying press release, the committee pointed the improving business and consumer sentiment in the aftermath of the US presidential election.

Ahead of the announcement, some argued the Fed will likely want to wait to see if that translates into an actual increase in spending and hiring.

“…by the March FOMC meeting, we should have a better sense of the degree to which recent improvements in business and consumer sentiment are affecting economic activity,” Lewis Alexander, chief US economist at Nomura, wrote in a note to clients.

President Donald Trump pledged to cut taxes for corporations and to invest about $550 billion in infrastructure. Wall Street had previously argued that these steps will encourage economic growth and inflation while supporting company earnings. Stocks surged after the election to new highs, and the Dow crossed the psychologically important 20,000 mark in January. (Although, it is now again below that level.)

Small business optimismNFIBSmall business optimism surged in December, mostly due to a huge shift in firms’ expectations for sales and the economy going forward.

“Following its rate hike at last December’s meeting, we expect the Fed to stay in wait-and-see mode until it has more clarity on the magnitude, composition, and timing of the anticipated fiscal stimulus,” Capital Economics’ Paul Ashworth wrote in a note to clients, ahead of the statement.

At its meeting in mid-December, the FOMC raised its benchmark interest rate by 25 basis points to a range of 0.50% to 0.75%. That marked the second rate hike in a decade.

FULL PRESS RELEASE:

Information received since the Federal Open Market Committee met in December indicates that the labour market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate stayed near its recent low. Household spending has continued to rise moderately while business fixed investment has remained soft. Measures of consumer and business sentiment have improved of late. Inflation increased in recent quarters but is still below the Committee’s 2 per cent longer-run objective. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labour market conditions will strengthen somewhat further, and inflation will rise to 2 per cent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

In view of realised and expected labour market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1/2 to 3/4 per cent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labour market conditions and a return to 2 per cent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its objectives of maximum employment and 2 per cent inflation. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 per cent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

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