The Federal Open Market Committee (FOMC) concluded its two-day meeting by deciding to hold the federal funds rate as expected at 1.50 to 1.75%. The FOMC also increased the IOER which is the interest rate it pays to commercial banks by five basis points. Following the decision, Treasuries jumped higher with the yield on the 10-year bill falling to 1.59%. Stocks and the dollar gave up early gains, while gold moved higher.
Changes in the FOMC Statement
Given that the rate decision was in line with expectation, more scrutiny is placed on the FOMC statement and Chairman Jerome Powell's press conference to give more insight into the Fed's next move. In terms of hiking, the Fed has gone out of its way to make clear that it has no intention to do so until inflation is "persistently" above its 2% inflation target which seems unlikely anytime soon.
In the FOMC statement, inflation language was changed to indicate that it may be necessary for the Fed to act more aggressively to "return" inflation to 2%. The Fed also downgraded its assessment of household spending from "strong" growth to "moderate" growth. Both of these developments are marginally dovish as it acknowledges the potential need for the Fed to act if inflation does not move higher and shows that the Fed is aware of the economy decelerating. Basically, odds for a rate hike got more slim and odds for a cut increased.
Powell's Press Conference
While most of Powell's speech and press conference struck the same dovish tone as the FOMC statement, he did mention that the Fed sees asset prices as "being somewhat elevated". Additionally, he reiterated that he expects inflation to move closer to its 2% target over the next few months.
It's certainly possible that inflation could modestly rise in the coming months due to low comps from 2019, but it does seem oblivious to recent developments like falling oil, an inverting yield curve, and a collapse in inflation expectations which are more meaningful indicators on a longer time frame. He cited a reduction in trade tensions, progress in Brexit talks, and supportive financial conditions as reasons for optimism.
Powell did provide some insight into his thinking on important matters. On manufacturing, he said there's no sign of recovery and trade tensions are not helping. On the coronavirus outbreak, he said it's too early to determine the effects, but the Fed is prepared to act if necessary. On the money markets and repo, Powell said they intend to continue to add reserves until at least April.