US Fed keeps rates unchanged, says inflation below target

Policymakers at the US Federal Reserve voted unanimously on Wednesday to keep policy unchanged, nodding to still "solid" labour market conditions, but pointing out that business fixed investment and exports remained weak and that its prefered measure of inflation continued to run below target.

As expected, the members of Federal Open Market Committee voted to keep the target range for the Fed funds rate at between 1.5-1.75%, arguing that the decision was "appropriate" in order to sustain the economic expansion and keep inflation near the committee's 2.0% target.

"The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate," the FOMC said in a statement.

When the FOMC last met, on 30 October, two rate-setters on the FOMC, Esther L.George and Eric S.Rosengren, had voted against the cut in the Fed funds target range.

To take note of, the Fed's reference to "including global developments and muted inflation pressures" was not included in its post-meeting statement from 30 October.

As well, as Ian Shepherdson at Pantheon Macroeconomics pointed out, in its new set of macroeconomic projections published alongside Wednesday night's decision, the FOMC removed the 'dot' representing expectations for a single interest rate hike in 2020.

Nonetheless, the Fed's new dot-plot continued to point to one interest rate hike in 2021 and 2022, as before, Shepherdson added.

Commenting on the Fed's decision, Dr. Kerstin Braun, President of Stenn Group, said: "Powell is right to leave rates unchanged. Employment rates are at a 50-year low and consumer sentiment is high, meaning US retail figures should be solid through the holidays. Markets are confident that the Fed will continue to fuel the decade-long expansion, taking a short-term view and ignoring the naysayers who caution about debt levels and asset bubbles.

"What's still worrisome is trade. The capricious US-China tariff war has turned into political theatre at the expense of real businesses. The uncertainty impacts short-term margins and long-term investment plans for companies with international supply chains.

"[...] With the US essentially neutering the World Trade Organisation (WTO), the era of trade spats - and the volatility that they bring - is only going to get worse."

For his part, Shepherdson told clients: "The statement specifically mentions “global developments and muted inflation pressures” as requiring monitoring, suggesting a downside bias to rates, but we remain of the view that the data won’t push the Fed into cutting rates again anytime soon.

"[...] This is a mildly stock-and Treasury-positive, but dollar-negative set of forecasts. Much is contingent, though, on the economy’s continuing reaction to the trade war, and to any changes in the tariff position; they are both unknowable."

Following the Fed's policy announcement, as of 1920 GMT, the yield on the benchmark two-year US Treasury note was slipping two basis points to 1.63%.