The clear message from the US Federal Reserve last night is that the current interest rate level is appropriate. The current monetary policy stance should strengthen economic growth and support a return to the 2% inflation target. Against this background, the Fed’s Monetary Policy Committee left the key rate corridor unchanged at 1.5% to 1.75% at its meeting yesterday. The key rate decision was taken unanimously. This had been unanimously expected by market participants.
Despite the unchanged level of key rates, other important monetary policy decisions were taken. For example, the interest rate for excess reserves (Interest on Excess Reserves IOER) was raised by five basis points as expected. This adjustment is primarily to be understood as a technical measure to ensure that the IOER and the effective Fed funds rate are in the middle of the targeted interest rate corridor. It was also announced that repo transactions would continue at least until April and T-Bill purchases would continue into the second half of the year. The central bankers want to ensure that the excess reserves of the commercial banks are at least 1.5 trillion. This would be a lower limit, although Powell did not want to explicitly set an upper limit despite repeated requests. According to Powell, the extension of the repo transactions until April does not represent a fixed timetable. Thus, this monetary policy measure could be continued as required even if the reserves of the commercial banks had reached an appropriate level.
Overall, the press statement was only marginally changed, but the macroeconomic outlook was assessed as slightly more pessimistic. Consumption activity is currently only moderate; in the previous press statement, the currency watchdogs spoke of strong consumption. In addition, the wording of the press statement on the inflation target was adjusted. In December, the Fed stated on record that the current key rate level was appropriate to stabilise inflation rates „close to“ 2%. This term „near“ has now been completely deleted. The background, Powell said, is to send a clear message to market participants that the Fed will not accept inflation rates below 2% in the long run. Some investors interpreted this as a dubious message, which is why yields declined.
However, when asked about the possible effects of the virus, Powell was rather taciturn. He did not want to get involved in speculation about the possible effects on the economy. It is far too early to quantify the effects on economic development in China or even on global economic growth.
We assume that the US Federal Reserve will leave key interest rates unchanged this year. Although fears have arisen in recent weeks that the coronavirus could possibly have an impact on the US economy, we believe that the US economy will not be able to benefit from this. Against this background, expectations of key rate cuts have intensified this year. However, at present it is hardly possible for the potential economic consequences to take hold. Ultimately, the US Federal Reserve has kept all options open to adjust monetary policy if its current growth expectations change. Should there actually be a significant change in economic expectations, the monetary watchdogs are likely to deviate from the announced pause. However, there is currently no reason to do so.
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