The US Federal Reserve building in Washington DC. Picture: REUTERS
The US Federal Reserve building in Washington DC. Picture: REUTERS

Washington — The US Federal Reserve on Wednesday held interest rates steady and signalled borrowing costs are likely to remain unchanged indefinitely, with moderate economic growth and low unemployment expected to continue through next year’s presidential election.

The Federal Open Market Committee left the benchmark overnight lending rate in its current target range between 1.50% and 1.75%.

New economic projections showed a majority of 13 of 17 Fed policymakers foresee no change in interest rates until at least 2021. The other four saw only one rate hike next year.

Notably, no policymakers suggested lower rates would be appropriate next year, a sign the Fed feels it has engineered a “soft landing” after a volatile year in which recession risks rose, the US bond yield curve inverted, and trade policy disrupted markets.

“The committee judges the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labour market conditions, and inflation near the ... symmetric 2% objective,” the Fed said in a policy statement after the end of a two-day meeting.

.. stocks rallied modestly after the decision, which had been widely expected by investors. The benchmark S&P 500 was up 0.2% on the day; at the time of announcement it was near the unchanged mark.

Yields on US Treasury securities were little changed, with the 10-year note last yielding 1.81% and the 2-year note yielding 1.64%. The dollar was flat against a basket of major trading partner currencies.

There were no dissents to the policy statement, the first without opposition since the April 30-May 1 meeting.

In the midst of an ongoing US-China trade war, Fed policymakers said they would continue monitoring “global developments” in deciding whether interest rates need to change.

They also said they would keep an eye on “muted inflation pressures”, a reflection of concern that the pace of price increases has failed to hit the central bank’s target.

After the Fed’s October policy meeting, Fed chairman Jerome Powell  said it would take a “material” change in the economic outlook for the Fed to change rates again. The Fed cut rates three times this year, including in October.

“It’s ‘steady as she goes’ from the Fed today – the statement provided little groundbreaking news on the path of monetary policy,” Jason Pride, chief investment officer of private wealth at Glenmede Trust, said in a statement.

“The prevailing message out of today’s meeting is that the Fed remains on hold, barring any material upside surprises for inflation.”

Strong labour market

The quarterly economic projections released on Wednesday showed little change from those in September, as policymakers sketched out an economy they feel has skirted recession risks and is poised to grow close to trend for several years more.

A reference in the October policy statement to “uncertainties” about the economic outlook was dropped on Wednesday.

Gross domestic product is projected to grow 2% in 2020  and 1.9% in 2021.

Unemployment is seen staying at its current level of 3.5% through 2020, rising to only 3.6% in 2021. In a demonstration of the disconnect between that low level of unemployment and inflation, the pace of prices increases is expected to rise only to 1.9% next year.

“The labour market remains strong and … economic activity has been rising at a moderate rate,” the Fed said. It added, however, that business investment and exports remained weak.

The economy will be a central issue in US President Donald Trump’s re-election campaign against a Democratic challenger likely to call for different economic policies. Trump repeatedly criticised the Fed in 2019 for not cutting rates faster and deeper.

The Fed’s forecasts offered little obvious fodder for either Democrats or Republicans, with the economy largely seen performing as it has — far short of the 3% annual growth Trump promised to produce, but also with historically low rates of unemployment.

Reuters

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