FOMC: Patience, patience, and yet more patience

Last night, the Fed more or less left its monetary policy focus unchanged. Although the IOER (interest on excess reserves) rate was lowered, the Fed said that this modification was a technical adjustment only. For this reason, it should not be read as a turn away from the present monetary policy strategy. And this clearly means: The Fed has a lot of patience. Overall, Chairman of the Fed Jerome Powell was more upbeat as regards global economic trends. Despite these remarks, the Fed’s statement showed its concern that inflation is at too low a level. The Fed economists went on record saying that the overall inflation rate and the inflation rate excluding food and energy prices have fallen of late and are lodged beneath the Fed’s target of 2%. In particular, the market-based inflation expectations are very low, they said.

At the press conference, Powell addressed the issue of low inflation rates. He commented that he assumed that the factors which have contributed to the low pressure on prices are temporary. The global risks, he went on record as stating, have receded somewhat and the US economy is tending solid overall. In this context, the Fed intended to exercise patience as regards further adjustments to the fed funds rate. The current level of the latter, he continued, is appropriate in order to achieve the central bank’s goals. As regards the criticism of the Fed by Trump, Powell seemed untroubled. All he did was emphasise that the Fed is not a political institution. He refused to comment on the controversial nomination for the Board. It was not his job to fill the position, was all he stated.

Since the global risks that the Fed cited in the past as the reason for its pause in changes to monetary policy are evidently starting to ebb, in their monetary policy rhetoric the central bankers have now focused on inflation being too low. Nevertheless, this does not justify swiftly cutting the fed funds rate, they said, as the Fed assumes that these reasons are only temporary in nature. It is therefore our opinion that the US central bank will for the time being not make any further adjustments to its monetary policy. The fact that it is no longer reducing its balance sheet should suffice to boost the economy. The Fed will presumably not lower the fed funds rate until the beginning of next year.

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