The Federal Reserve is keeping its key interest rate unchanged and signaling that it could leave rates alone in coming months given economic pressures and mild inflation. (Jan. 30)
Federal Reserve Chairman Jerome Powell said Tuesday the central bank will take a “patient approach” as it weighs future interest rate hikes, echoing the more market- friendly strategy he and other Fed officials have adopted the past couple of months.
With inflation muted, “That gives us the ability to be patient with monetary policy and that’s what we’re going to do,” Powell told the Senate banking committee. “This is a good time to be patient and watch and wait and see how the economy evolves.”
Powell added he’s not worried that accelerating wage growth will spur faster inflation, which in turn could require higher interest rates. And he affirmed recent suggestions that the Fed will maintain a more elevated balance sheet than expected, a strategy that hold down long-term interest rates.
In a research note, Capital Economics said the Fed is unlikely to raise rates again this cycle and its next move will probably be a rate cut early next year as the economy weakens.
Powell said the economy grew “at a strong pace” last year and “the job market remains strong,” but he added that “conflicting signals” have emerged.
“While we view current economic conditions as healthy and the economic outlook as favorable, over the past few months we have seen some crosscurrents and conflicting signals,” he said.
Powell and other Fed policymakers have made an abrupt reversal since raising interest rates in mid-December for the fourth time in 2018 and forecasting two more hikes this year.
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Markets plunged, viewing the central bank’s approach as too aggressive in light of a slowing global economy, a lingering trade fight with China, and the fading effects of federal tax cuts and spending increases.
And since the tumbling markets hammered consumer and business confidence, risking the broader economy, Powell and other Fed policymakers promptly pulled back. At a news conference, Powell suggested a rate cut was just as likely as an increase. Markets, in turn, have rebounded strongly the past couple of months.
The Fed lifts rates to head off a spike in inflation but annual consumer price increases have hovered below the central bank’s 2 percent target lately. Yearly pay increases have topped 3 percent, above the 2.5 percent or so average the previous couple of years. That could force companies to eventually raise retail prices to maintain profit margins.
But other forces, such as e-commerce and the more global economy have helped temper inflation.
“We welcome (faster wage growth),” Powell said Tuesday. “We don’t find it troubling from an inflation standpoint at this point.”
Fed officials are also moving toward an agreement to stop reducing the Fed’s $4 trillion balance sheet later this year, sooner than expected, a strategy that should keep long-term rates slightly lower.
The Fed has been shrinking the portfolio of mortgage-backed securities and Treasurys that it amassed during and after the 2008 financial crisis to push down long-term rates.
When the Fed keeps more bonds in its portfolio, it leaves more cash reserves in the banking system. Powell noted banks need those reserves to meet stricter requirements for capital buffers since the 2008 financial crisis. Powell said Tuesday he expects the Fed to stop reducing its balance sheet when bank reserves reach $1 trillion, which would translate to a roughly $3.5 trillion balance sheet, above the $3 trillion previously anticipated.
The bottom line should be slightly lower borrowing costs for consumers and businesses.
Powell also faced tough questions from Sen. Elizabeth Warren, D-Mass., a presidential candidate, about the proposed $66 billion merger of SunTrust and BB&T, which would create the nation’s sixth largest bank. Noting that since 2006, the Fed has approved 3,819 merger applications, Warren said, “Your approval process appears to be a rubber stamp.”
Powell acknowledged that banks typically withdraw proposed mergers that are likely to be rejected after conversations with Fed officials. Warren suggested that indicates Fed decisions are made behind closed doors and public comments opposing mergers have little effect.
Of the proposed SunTrust-BB&T tie-up, she asked, “Just another rubber stamp?”
“No, not at all,” Powell responded. “We’re going to conduct a fair and open and transparent process.”
Warren shot back, “The Fed works for big, rich banks that want to get bigger and want to get richer and everyone else pays the price” through layoffs, higher fees and other impacts.
Federal Reserve Chairman Jerome Powell said Friday that he will not resign if asked to do so by President Donald Trump. Powell said the central bank intends to be flexible going forward in determining when to hike its key policy rate. (Jan. 4)
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