Fed Keeps Interest Rates Steady

The Federal Reserve Board on Wednesday opted to keep the benchmark Federal Funds rate where it is, ending a recent run of interest rate cuts.

The interest rate-setting Federal Open Market Committee cut the target Fed Funds rate three times in 2019. The committee will next meet in late January.

“Information received since the Federal Open Market Committee met in October indicates that the labor market remains strong and that economic activity has been rising at a moderate rate,” the FOMC said in a statement. “Job gains have been solid, on average, in recent months and the unemployment rate has remained low.”

The FOMC noted overall inflation and inflation for items other than food and energy are running below 2 percent on a 12‑month basis. “Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed,” the statement said.

Mortgage Bankers Association Senior Vice President and Chief Economist Mike Fratantoni said he expects the Fed will hold rates at this level through the course of next year, “with slower economic growth, a steady job market and modest inflation allowing them to take an extended pause.”

Fratantoni noted FOMC voters generally have similar expectations regarding the economic forecast, with many anticipating rates will be “on hold” for an extended period. “Steady short-term rates should keep longer-term rates, including mortgage rates, steady as well, which will be a positive for homebuyers in the year ahead,” he said.

Financial markets remain somewhat fragile, with many analysts concerned regarding the lack of liquidity in overnight funding markets, Fratantoni said. “The Fed’s ongoing efforts to add liquidity through repos and Treasury purchases will remain a key focus of meetings in the year ahead, even if their short-term rate target is locked in,” he said.

The FOMC’s unanimous vote included Chair Jerome Powell, Vice Chair John Williams and committee members Michelle Bowman, Lael Brainard, James Bullard, Richard Clarida, Charles Evans, Esther George, Randal Quarles and Eric Rosengren.

The Fed has said it targets a 2 percent inflation rate. Yesterday the Bureau of Labor Statistics’ said its Consumer Price Index inflation rate matric rose 0.4 percent in November and 2.1 percent since November 2018.

Sarah House, Senior Economist with Wells Fargo Securities, Charlotte, N.C., said inflation remains “sufficiently tame” to keep the Fed from its easing bias.

“FOMC Chair Powell has suggested higher inflation is the main criteria for the committee to reverse course again and raise rates,” House said. “But the trend in core CPI has not strengthened meaningfully in recent months”

More fundamentally, the Fed’s rate-setting committee has emphasized “symmetry” around its inflation target since 2017, House said. “With slowing growth expected to keep a lid on inflation and long-term inflation expectations near historic lows, the Fed’s next move on interest rates is much more likely to be down than up,” she predicted.