Patience is still the word

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05/02/2019 | 04:14 pm
On Wednesday, May 1, the American Central Bank (Fed) kept its overnight rates in the range of 2.25% and 2.50%.




As expected, the Fed kept its patient stance. Despite Donald Trump's criticism, the institution unanimously maintained its overnight rates in the range of 2.25% and 2.50%.
Source: Bloomberg LP, Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities

The Monetary Committee's statement highlights the strong labor market and the solid pace of economic activity, with a 3.2% growth in the first quarter. However, it notes that both household consumption expenditure and business investment slowed in the first three months of the year and that inflation has continued to run below the Fed’s 2% target.

The PCE consumer expenditure price index in March was 1.5% and 1.6%, excluding food and energy prices. On Wednesday, the Fed  reduced its reserve rate by five basis points from 2.40% to 2.35% and reiterated that it would be patient in determining future adjustments to rates, monitoring inflation and global economic developments.

Source: Bloomberg LP, Federal Reserve Board, U.S. Department of Commerce and Wells Fargo Securities

No change in sight

At the press conference, Fed chairman Jerome Powell stated that the committee didn’t see a strong case for a rate move either way. So when should we expect any move on rates? According to analysts at Charles Schwab, the Fed is likely on hold for the near term, and will take a patient approach to its policy decisions as the year progresses.

“Although the economy continues to grow and the job market remains strong, most inflation indicators continue to remain below the Fed’s 2% target. A patient approach going forward likely means that Treasury yields likely won’t rise much from their current levels. Historically, Treasury yields of all maturities tend to converge at the Fed’s terminal rate, or the rate at which it stops its rate-hike cycle.”

Meanwhile, Wells Fargo believes that the dogged shortfall of inflation from the FOMC’s target is a major reason the FOMC has maintained its patient stance on future policy adjustments.

“The interest rate the Fed pays on excess reserves was reduced 5 bps, but that was only a technical adjustment to keep the effective funds rate within the targeted range. We do not view it as a signaling device for an upcoming change in the fed funds target.”  It concludes: “with U.S. growth already slowing back toward its potential trend and core inflation remaining stubbornly low, we do not expect the FOMC to tighten policy anytime soon.”
Romain Fournier
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