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Fed holds interest rates, markets show muted reaction

Fed holds interest rates, markets show muted reaction

Following three cuts in the second half of 2019, the Fed left interest rates steady during the first rate decision in 2020. As expected, the Fed opted to keep its benchmark Fed Funds rate unchanged at 1.5% to 1.75%.

"The Committee judges that the current monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the 2 percent objective," the Fed statement said.  

Since December's meeting, "the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, and the unemployment rate has remained low."

For future rate decisions, the Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures.

One technical tweak is that the Fed hiked the interest rate on excess reserves by 5bps to 1.6% from 1.55%, while the Committee decided to keep its repo scheme run until April, instead of expiring in January.

The Fed statement mentioned nothing about the Coronavirus, making it clear for investors that the Fed is not worried.

The US dollar snapped some of its earlier gains to trade at 97.90, but still hovers close to the highest level since December 2 recorded today at 98.00.

Fed Powell

We expect inflation to move closer to two percent over the next few months as unusually low reading from the past drop out of calculation.

Inflation continues to run below our symmetric two percent objective, but Powell cited the continued declines in manufacturing and weak exports.

The current monetary policy is appropriate to support growth and unemployment rates are at their lowest levels.

If inflation rates continue to fall below the bank’s target, the Fed will resort to lowering inflation expectations and thus the possibility of lowering interest rates again.

US inflation should move closer to the 2% target in coming months. We are determined to avoid inflation running persistently below 2%, he insisted.

Labor market continues to perform well. Supply side shock from people coming into labor market is good thing, but maybe holding wages down.

Powell believes the Fed can gradually reduce repo as demand is satisfied, and the central bank is prepared to adjust details of repo plans if necessary.

The spread of the Corona virus is bad news and we expect its negative impact on the Chinese economy, but we are watching the developments related to its spread outside China and its potential effect on the US economy.

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