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Sunday, September 26, 2021

Fed Holds Rates Steady, Watching Data Carefully

FLASH: Wednesday’s projections open the door for the Fed to lower rates in short order if the economy weakens, or US trade disputes with China and other nations escalate.

Fed held interest rates steady Wednesday but signaled possible rate cuts of as much as half a percentage point over the remainder of this year, as it responded to increased economic uncertainty and a drop in expected inflation.

The Fed said it “will act as appropriate to sustain” the economic expansion as it approaches the 10-yr mark and dropped a promise to be “patient” in adjusting rates.

Nearly half its policymakers now show a willingness to lower borrowing costs over the next six months.

While new economic projections showed policymakers’ views of growth and unemployment largely unchanged, they saw headline inflation at just 1.5 percent for the year, down from the 1.8 percent projected in March. They also expect to miss their 2 percent inflation target next year as well.

7 of 17 policymakers said they expected it would be appropriate to cut rates by half of a percentage point by the end of Y 2019, and an eighth saw a rate cut of a Quarter point as appropriate.

That was not enough to change the median outlook for the Fed’s targeted overnight lending rate, which officials projected to remain in a range of between 2.25% and 2.50% for the rest of this year. It represented a significant shifting of views on the Fed.

It appeared many, and maybe most, policymakers trimmed a full half percentage point from their outlook for rates.

Only one policymaker continues to see a rate hike as likely in Y 2019.

The long-run federal funds rate, a barometer for the state of the economy over the long term, was cut to 2.50% from 2.80%.

Along with the change in the policy statement, Wednesday’s projections open the door for the Fed to lower rates in short order if the economy weakens, or US trade disputes with China and other nations escalate.

The Fed continued to regard the labor market as “strong” and said “sustained expansion of economic activity” and eventually rising inflation were still “the most likely outcomes.”

The drop in inflation was a blow as the Fed washoping to reach its target sometime next year.

Fed Chairman Powell will hold a press conference at 2:30p EDT (1830 GMT) to elaborate on the results of the policy meeting, which was the 1st since President Trump raised tariffs on $200-B of Chinese imports and threatened, though ultimately decided against, imposing new tariffs on Mexican goods.

Those actions caused Fed officials to change their tone from largely dismissing the macroeconomic fallout of President Trump’s trade policies to worrying that a new world order of persistent high tariffs and reordered global supply chains could be emerging.

St. Louis Fed President James Bullard, who argued that rates should be cut, dissented in Wednesday’s policy decision.

Stay tuned…

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