Fed Holds Rates Steady… "Economic Activity Expanding at a Solid Pace" [Fed Watch]

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The United States Central Bank (Fed) has decided to keep the interest rate steady at 4.25~4.5% per annum. The pivot stance that had continued since last September has thus been halted after four months.

Jerome Powell, Chairman of the Fed, announced this decision following the two-day FOMC meeting that concluded on the 29th (local time). The Fed stated that "economic activity in the U.S. continues to expand at a solid pace," adding that "the unemployment rate has stabilized at a low level in recent months, and inflation remains somewhat elevated." This implies that there is not a significant need for further rate cuts.

The revised statement noted that "the risks to achieving employment and inflation goals are judged to be roughly balanced." The Wall Street Journal (WSJ) analyzed this as a sign that the Fed feels more comfortable with the interest rate level above the neutral rate than before.

The Fed had cut rates by 0.5 percentage points, 0.25 percentage points, and 0.25 percentage points in September, November, and December, respectively, but has maintained a cautious stance on rate cuts since Donald Trump was elected president on November 5th last year. The Fed added that it "will continue to reduce its holdings of Treasury and agency debt and agency mortgage-backed securities."

In his opening remarks at the subsequent press conference, Chairman Powell assessed that "the economy is generally strong and has made significant progress toward our goals." He continued, "Last year's economic growth rate is expected to exceed 2% due to resilient consumer spending," and "while investment in facilities and tangible assets appears to have slowed in the fourth quarter, overall it has turned strong after mid-year weakness last year."

He particularly reiterated the robust state of the labor market. "Employment growth averaged 170,000 per month over the past three months, and the unemployment rate has stabilized since mid-last year, remaining low at 4.1% as of December," he reported. "The nominal wage growth rate has eased over the year, and various indicators suggest that the labor market is generally balanced," he explained.

Chairman Powell noted that prices exceed the 2% target, stating, "Total PCE prices rose 2.6% year-over-year in December, and core PCE prices, excluding volatile food and energy, increased by 2.8%." However, he added, "Long-term inflation expectations remain well anchored," and "we see the risks to achieving employment and inflation goals as roughly balanced."

He described the 1 percentage point policy rate cut over the past four months as "appropriate," emphasizing that "our policy stance is significantly less restrictive than before, and the economy remains strong," and "there is no need to rush."

Below is the full FOMC announcement.

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Recent indicators suggest that economic activity continues to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain robust. Inflation remains somewhat elevated.

The Committee aims to achieve maximum employment and 2 percent inflation over the long term. The Committee judges that the risks to achieving employment and inflation goals are roughly balanced. The economic outlook is uncertain, and the Committee is attentive to risks to both sides of its dual mandate.

To support the Committee's goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In determining the timing and extent of future adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, evolving outlook, and balance of risks. The Committee will continue to reduce its holdings of Treasury and agency debt and agency mortgage-backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee stands ready to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Washington = Lee Sang-eun, Correspondent selee@hankyung.com