The Fed Is on Hold for a While
The Federal Open Market Committee (FOMC or Fed) left the target range for the federal funds rate unchanged at 1.50 to 1.75 percent at its December 2019 meeting, as nearly all analysts anticipated. Fed Chair Jerome Powell made clear in the subsequent press conference that it will take a significant surprise in the economy for the Fed to either cut or raise rates over the next year. Stock prices were little changed, and bond yields fell slightly after the Fed’s announcement.
In light of the strong labor market report for November, Chair Powell’s enthusiasm for the benefits of a tight labor market sounded rather dovish, which probably explains the bond market reaction. However, the dovishness clearly had limits. When asked why the Fed has ruled out raising the inflation target to 4 percent (to increase its ability to fight future recessions) in the context of this year’s policy strategy review, Powell noted that it might be difficult to reconcile inflation of 4 percent with the Fed’s price stability mandate and made clear that an increase is not in the cards at this time, at least.
Powell was asked a few questions about the repo market, which experienced a few days of funding stresses and elevated yields in September. He avoided taking any position on the possibility of creating a standing repo facility to alleviate such stresses automatically, as some have advocated, saying only that any action would be decided at a later date. For now, the Fed is focused on increasing bank reserves and conducting sufficient ad hoc repo operations to satisfy year-end funding needs while conferring closely with regulators on the appropriate treatment of reserves and other liquid assets for banks.