Federal Reserve
Holding Firm

The Fed’s stance barely changed from its previous meeting, though low inflation continues to be a concern.

February 26, 2020
Craig Imamura

Key Takeaways

  • As expected, the Federal Open Market Committee held the federal funds target-rate range at 1.50%–1.75%
  • The only language change to the Fed’s previous statement pertained to household spending rising at a “moderate pace” instead of a “strong pace”
  • The Fed tweaked the interest it pays on reserves from 1.55% to 1.60%

At its January meeting, the Federal Open Market Committee (FOMC) unanimously voted to hold the federal funds target-rate range at 1.50%–1.75%. The policy announcement contained no surprises; in fact, the FOMC changed only a few words from its Dec. 11 statement (see below).

January 29, 2020 Statement

“Although household spending has been rising at a moderate pace …”

December 11, 2019 Statement

“Although household spending has been rising at a moderate pace …”

Interest on required and excess reserves moved from 1.55% to 1.60%. This minor tweak was intended to nudge the target rate toward the middle of the rate range. In his remarks, Chair Jerome Powell noted that “monetary policy is well positioned to … a return of inflation to our symmetric 2 percent goal.” This was a slight change from the chair’s December’s comments when he stated that Fed policy will support inflation “near our symmetric 2 percent objective.” Powell also stated that the Federal Reserve (Fed) “wanted to send a clearer signal that we’re not comfortable with inflation ... running persistently below our 2 percent symmetric objective.” We believe this represents a higher inflation hurdle for the Fed to increase the target rate. While the Fed has indicated it felt comfortable with current interest rates, a default expectation would be for the next Federal Reserve to cut rates in an effort to keep inflation at or below 2%. The table below shows rate-cut probabilities for the remainder of 2020, according to Bloomberg:

In general, the Fed continues to remain accommodative through balance-sheet expansion, repo-market intervention, and stronger commitment to raise inflation. For the Fed’s next meeting on March 18, current odds for a hike are 0%, with a 16% chance of a rate cut¹.

¹Bloomberg Finance L.P., 1/29/20

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