Federal Reserve chair Jerome Powell. Picture: REUTERS/JOSHUA ROBERTS
Federal Reserve chair Jerome Powell. Picture: REUTERS/JOSHUA ROBERTS

Washington — The Federal Reserve kept its key interest rate unchanged, as expected, on Wednesday and continued to signal policy would stay on hold for the time being as the US enters a presidential election year.

The target range of the federal funds rate of 1.5% to 1.75% is “appropriate to support sustained expansion of economic activity”, the Federal Open Market Committee (FOMC) said on Wednesday, repeating language from the December statement. The central bank made a technical adjustment to the rate it pays on banks’ reserve balances and said it would extend a programme aimed at smoothing volatility in money markets — at least through April.

Federal Reserve chair  Jerome Powell said on Wednesday the outbreak of a deadly SARS-like virus in China is adding to questions around the global economic outlook. 

The world had been experiencing sluggish growth amid trade conflicts that dampened manufacturing and exports, Powell told reporters following the Fed’s policy meeting. While some concerns have diminished recently and there are signs that global growth may be stabilising “uncertainties about the outlook remain, including those posed by the new coronavirus”.

Immediately after the decision, US stocks extended gains while yields on the 10-year Treasury were little changed, as was the dollar. Traders trimmed bets on easing by the Fed in 2020.

Policymakers also changed their language to say that the current stance of monetary policy is appropriate to support “inflation returning to the committee’s symmetric 2% objective”. Previously they had said policy was supporting inflation “near” the goal.

Their preferred personal consumption expenditures price index rose 1.5% for the 12 months ending in November.

Officials approved a 5 basis-point increase on the rate they pay on excess reserves to 1.6% — a technical adjustment designed to keep the main funds rate within its designated range. In another tweak, the Fed raised its overnight reverse repurchase rate by the same amount to 1.5%, and extended term and overnight repos at least through April. The central bank had earlier signalled such measures were possible.

In addition, the FOMC downgraded its assessment of household spending to say it has been rising at a “moderate” pace, instead of its earlier characterisation of the rate as being “strong”. The committee repeated that economic activity has been rising at a “moderate” rate, with “strong labour market conditions”.

Officials gathered with financial markets on edge as a deadly virus in China weighs on its economy and could threaten global growth. Policymakers also endured another attack from President Donald Trump, facing re-election in November, who reiterated in a tweet on Tuesday his latest call for the Fed to cut rates.

The FOMC decision was the panel’s second-straight unanimous vote.

Following three cuts in 2019, US central bankers have said their policy is supporting the country’s record expansion despite headwinds from trade and geopolitical uncertainty.

Powell has said a “material reassessment” of the economic outlook would be required for any shift.

Nonfarm payroll growth averaged 176,000 a month in 2019, while the unemployment rate held below 4% for most of the year.

Data since the December FOMC meeting has shown the housing market has held up, fuelled in part by 2019’s rate cuts. Consumers also remain upbeat about their prospects, surveys have shown.

Manufacturing, however, has showed scant improvement, consistent with a downshift in investment and sluggish markets for exports.

Business investment could be further dented by Boeing’s suspension of 737 Max production starting in January. The aircraft maker received just three commercial aircraft orders in December, down from 63 in November, and does not expect regulators to clear the grounded Max to resume flying until mid-2020.

Bloomberg