Fed stays put on rates, T-bill purchases to continue

The US central bank kept all its main policy settings unchanged on Wednesday, as expected by analysts, including its commitment to continue purchasing very short-term Treasury bills at least into April.

In their policy statement, the members of the Federal Open Market Committee again described the US jobs market as "strong", although on this occasion growth in household spending was said to be "moderate" instead of "increasing at a strong pace".

By unanimity, the target range for the federal funds rate was kept at 1.50-1.75%.

On inflation, the Fed used the same description as at its December meeting, saying that core consumer prices were running below its target level of 2.0% and that market-based measures of inflation compensation remained low.

One minor change was a five basis point increase on the interest rate paid on lenders' excess reserves with the monetary authority to reach 1.60%, but that was described as a "housekeeping" move to shore up the Fed funds rate, which had been hovering above the lower bound of its target range.

Significantly, the FOMC reiterated its intention to continue buying Treasury bills "at least into the second quarter of 2020" and "at least through April".

Commenting on that decision, Ian Shepherdson at Pantheon Macroeconomics said: "We expect the Fed to set out in March how and when it intends to wind down the bill purchases; we expect a taper to perhaps $30B in May and $5-to-$10B in June.

"The Fed will need to keep the balance sheet rising roughly in line with nominal GDP growth in order to ensure ample reserves, so we doubt purchases will stop altogether."

In his post-meeting press conference, Fed chairman, Jerome Powell, stressed that the objective of the T-bill purchases was to return the level of reserves to an "ample level", something the FOMC expected to happen by the second quarter.

Powell also said that in his opinion asset valuations were "somewhat elevated", but not "extremely", going on to add that risks to financial stability were "moderate overall".

Paul Ashworth at Capital Economics chipped in saying: "With the yield curve close to re-inverting, speculation has risen that the Fed might consider cutting interest rates again, perhaps because of fears about the potential economic disruption from the new coronavirus.

"But unless the US experiences its own epidemic, we doubt the indirect effects from the disruption in China would be enough to warrant a US rate cut. We continue to expect that the Fed will leave rates on hold for an extended period."

As of 2015 GMT and in response to Powell's remarks, the yield on the two-year US Treasury note was falling by five basis points to 1.42%, alongside a 0.22% advance for the S&P 500 to 3,283.21.