31 Jan 2019 15:36 IST

US Federal Reserve signals patience on interest rates

This comes amid strong macroeconomic performance

The US Federal Reserve has said that it would be “patient” with any increase in interest rates this year, amid strong macroeconomic performance alongside growing evidence of crosscurrents and slowing down of some major foreign economies, particularly China and Europe.

The cumulative effects of those developments over the last several months warrant a patient wait and see approach regarding future policy changes, Federal Reserve Chairman Jerome Powell told reporters on Wednesday after the meeting of the Federal Open Market Committee.

“In particular, our statement today says, in light of global economic and financial developments and muted inflation pressures, the committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,” he said.

Powell said this change was not driven by a major shift in the baseline outlook for the American economy.

“Like many forecasters, we still see sustained expansion of economic activity, strong labour market conditions, and inflation near two per cent as the likeliest case. But the crosscurrents I mentioned suggest the risk of a less favourable outlook,” he said.

Observing that the US economy is in a good place, he said the jobs picture continues to be strong, with the unemployment rate near historic lows and with stronger wage gains.

“Inflation remains near our two per cent goal. We continue to expect that the American economy will grow at a solid pace in 2019, although likely slower than the very strong pace of 2018. We believe that our current policy stance is appropriate at this time,” he said.

Powell, however, said that despite this positive outlook, over the past few months there has been some crosscurrents and conflicting signals about the outlook.

“Growth has slowed in some major foreign economies, particularly China and Europe. There is elevated uncertainty around several unresolved government policy issues, including Brexit, ongoing trade negotiations, and the effects from the partial government shutdown in the United States,” he noted.

Financial conditions tightened considerably late in 2018 and remain less supportive of growth than they were earlier in the 2018. And while most of the incoming domestic economic data have been solid, some surveys of business and consumer sentiment have moved lower, giving reason for caution, he observed.

Powell told reporters that the case for raising rates has weakened somewhat. The traditional case for rate increases is to protect the economy from risks that arise when rates are too low for too long, particularly the risk of too high inflation, he said.

“Over the past few months, that risk appears to have diminished. Inflation readings have been muted, and the recent drop in oil prices is likely to push headline inflation lower still in coming months,” he explained.

According to Powell, the committee is now evaluating the appropriate timing for the end of balance sheet runoff.

“This decision will likely be part of a plan for gradually reaching our ultimate balance sheet goals while minimising risks to achieving our dual mandate objectives and avoiding unnecessary market disruption. We will be finalising these plans at coming meetings,” he said.

Noting that the process of balance sheet normalisation is unprecedented, he said throughout this process, the Fed has attempted to lay out its plans well in advance, and it has been willing to make changes as it learns more about the process.

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