The Fed leaves rates unchanged, citing lack of inflation pressure


US Federal Reserve Chairman Jerome Powell speaks at a news conference following a meeting of the Federal Open Market Committee (FOMC) in Washington, DC, December 19, 2018.

Andrew Harrer | Bloomberg | Getty Images

Officials in the Federal Reserve voted to keep interest rates stable on Wednesday as the lack of inflationary pressure has outpaced the otherwise-growing economy.

The central bank kept its benchmark rate at a target of between 2.25% and 2.5%, meeting market expectations, though perhaps disappointing President Donald Trump, who earlier this week called on the Fed to reduce the rate by 1 point percentage

Trump cited the lack of inflation as one of the main reasons for a cut in rates and said in two tweets on Tuesday that economic growth would be much stronger if the Fed eased the reins of the policy.

Instead, the Federal Open Market Committee's policy formulation voted unanimously to maintain the current range. The committee, however, made a technical adjustment to keep the fund rate closer to the midpoint of the target range.

Interest paid on the surplus reserves held by the Fed at the Fed will now be set at 2.35%, or 0.05 percentage points lower than before. Before two similar adjustments last year, the Fed was raising interest rates and the reserve ratio together, with the latter acting as a cap on the benchmark rate.

However, the fund rate was drifting at the top of its range, most recently traded at 2.45 percent. Banks currently hold $ 1.56 trillion at the Fed, with a considered excess of $ 1.41 trillion.

In its view of the economy, the Fed adjusted part of the language of the statement after the March meeting to indicate that growth remains strong.

This week's statement said that "economic activity has risen at a solid rate," again noting that job gains "were solid" and that the unemployment rate "remained low." The unemployment rate is 3.8%, around its lowest level in 50 years.

On the critical issue of inflation, the statement said that "market-based inflation measures have remained low in recent months."

Running below 2 percent

The committee offered another language adjustment that reflects the picture of inflation without dimming.

"On a 12-month basis, overall inflation and inflation for items other than food and energy have dropped to below 2 percent," the statement said. After the March meeting, the committee attributed the weakening of inflation to lower energy prices.

The decision follows a much stronger economic performance in the first quarter than virtually every economist has predicted. GDP rose 3.2%, challenging forecasts that demand little or no growth.

In addition to a weak month in February, the labor market has also been strong. Economists design non-farm payrolls in April, about 180,000; the report will be released Friday.

Financial markets also performed well, with the Dow Jones Industrial Average rising about 14 percent in 2019 after a disastrous end to 2018 caused by market fears that the Fed would continue in a tightening trajectory.

Inflation, however, remained well below the Fed's 2% symmetric target. The central bank's preferred indicator showed a gain of only 1.6% in March by excluding volatile food and energy prices.

Trump and other White House officials believe that low inflation opens the door to more facilities. Markets, meanwhile, calculate that the Fed should remain stable for some time, and then allocate a 67% chance of a rate cut by the end of the year.

The Fed is easing policy a bit. As of Thursday, the committee lowered the ceiling to the value of Treasury profits that will come out of the month of the balance sheet. Up to $ 30 billion has been allowed to roll, a level that will now decrease to $ 15 billion.

The Fed's balance sheet is currently close to $ 3.9 trillion, most of which is comprised of Treasurys and mortgage-backed securities. The rolloff of MBS will be $ 20 billion per month.


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