Fed Maintains Rates & Indicates Same Stance for 2020

Alan Penny

12 December 2019

3 min read

dollar notes under US flag

  • Fed stayed dovish and kept benchmark rate steady
  • No changes expected in 2020
  • US dollar slides

Wednesday, the US Federal Reserve announced the decision to maintain interest rates at their current level. Chairman Jerome Powell also signaled that the Fed was unlikely to take any action next year. This is likely prompted by the low rates of inflation.

The Fed, therefore, kept the rate in the 1.5% – 1.75% target range.

However, yesterday’s decision was in line with market expectations. The Fed, therefore, kept the rate in the 1.5% – 1.75% target range.

In their statement, the Federal Open Market Committee signaled that they wouldn’t make any further changes to the monetary policy. They didn’t specify the timeframe but did say that they would continue to monitor the situation. Despite several opposing views in other meetings of late, this time, the decision was unanimous.

Individual members don’t expect a rate hike in 2020

At the meeting in September, eight of the committee’s members expected no changes in monetary policy in 2020. However, nine believed one or more hikes would be necessary. One member even foresaw the need for three increases.

This year, the Fed lowered its benchmark rate three times. This was a complete shift from last year’s monetary policy. It was meant to protect the US economy from suffering the same slowdown in growth as the global economy.

Yesterday, though, only four members of the total 17 expected that the rate would go up by a quarter of a point in 2020. For 2021, though, it seems that the committee expects one or maybe even two rate hikes.

Economic growth projections as Fed maintains rates

This more dovish stance was accompanied by no changes in terms of forecasts for US economic growth. Thus, the FOMC once again stated they expect 2019 to close with an increase in GDP of 2.2%. Subsequently, they expect a 2% gain in 2021, following by 1.9%, then 1.8%.

However, inflation forecasts did change. Thus, the FOMC expects core personal consumption expenditures to come in at a growth of 1.6% at the end of 2019. This is compared to the forecast of 1.8% issued in September. Estimates for 2020 remained the same at 1.9%, as well as for 2021 and 2022 at 2%.

The committee’s mandate is to maintain stable prices and to lower unemployment rates as much as possible, preferably to zero. Unemployment is at its lowest in 50 years, and November saw record job creation figures.

The problem is that inflation has remained under 2%, a level which the Fed sees as healthy for the economy. Thus, for the past few weeks, the FOMC has been considering various strategies on how to raise inflation. The FOMC didn’t mention any change in their strategy in the statement, though.

US dollar slides as hope for a rate increase dwindles

The US dollar slipped against many currencies on Thursday. It experienced some of the most significant losses in weeks. This is the result of traders losing any hope for a rate increase soon as the Fed maintains rates at their current levels.

The Fed was also less optimistic than the market expected in terms of future economic growth. Investors are also worried as the deadline for another round of tariffs on Chinese goods is closing in.

Thus, the US dollar was trading at $1.1133 against the euro and at 108.47 against the yen.

Written By
Alan Penny

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