Hikes to halt for 2019, Fed indicates
21 March 2019 Washington
Image: Shutterstock
The Federal Reserve has indicated that there will be no more hikes ahead this year and said that they would be 鈥榩atient鈥� and take a 鈥榳ait-and-see approach鈥� to changes.
In the Fed鈥檚 press conference opening remarks, chairperson, Jerome Cramer, said: 鈥淲e have noted some developments at home and around the world that bear close attention. Given the overall favourable conditions in our economy, my colleagues and I will be patient in assessing what, if any, changes in the stance of policy may be needed.鈥�
He explained that the US economy is in a good place and the Fed continues to expect that the American economy will grow at a solid pace in 2019, although likely slower than the very strong pace of 2018. Cramer added that they believe that their current policy stance is appropriate.
In his opening remarks he cited: 鈥淪ince October 2017, we have been allowing our asset holdings to decline by not reinvesting all of the payments we receive as securities matured or were prepaid.鈥�
鈥淭oday [20 March], we announced that we intend to slow the runoff of our assets starting in May, and to cease runoff entirely in September of this year.鈥�
Cramer continued: 鈥淚n September, reserve balances may still be somewhat above the level required to conduct policy efficiently and effectively. If this is so, we may hold the size of our asset holdings roughly constant for a time.鈥�
During this time, ongoing gradual increases in currency and their other non-reserve liabilities would imply very gradual declines in reserve balances, Cramer revealed.
According to Cramer, when the committee judges that reserves should not decline further, securities holdings will again begin to rise, as dictated by the growth of demand for their reserve and non-reserve liabilities.
The Fed believes that these plans will facilitate a predictable, transparent, and smooth process, and will make additional adjustments if conditions warrant, it was asserted.
Cramer highlighted: 鈥淭he committee will soon turn to a few remaining normalisation topics, including the desired maturity composition of our portfolio of treasury securities, and they maintain their long-stated intention to return to a portfolio consisting mainly of treasury securities.鈥�
鈥淭hus, we always emphasise that the interest rate projections in the simplified employee pension are not a committee decision. They are not a committee plan. As chair Yellen noted some years ago, the Federal Open Market Committee statement, rather than the dot plot, is the device that the committee uses to express its opinions about the likely path of rates.鈥�
鈥淭oday, the committee released revised balance sheet normalisation principles and plans. We have long said that the size of the balance sheet will be considered normalised when the balance sheet is once again at the smallest level consistent with conducting monetary policy efficiently and effectively.鈥�
鈥淲e have sought to make the normalisation process transparent, predictable, and gradual in order to minimise disruption and risks to our dual mandate objectives.鈥�
In a question to the chair, one member of the press asked: 鈥淲ith a new dot plot today, you鈥檝e gone from two rate hikes in 2019 to zero. You still have one joined for next year. The Feds funds futures trading that has been alluded to has been showing great cuts at the end of this year. Is that a possibility in your mind?鈥�
Cramer replied: 鈥淭he data that we are seeing is not currently sending a signal which suggests moving in either direction, which is why we are being patient. We feel our policy rate is in a range of netural, economy rate is growing in trend, inflation is close to target and employment is under 3 percent. It is a great time for us to watch and wait and see how things evolve.鈥欌��
Meanwhile, on the topic of Brexit, another audience member said: 鈥淭here is huge uncertainty at the moment over Brexit negotiations, how much of a factor has this been to the Feds in terms of patience to monetary policy and what is your base case on that?鈥�
鈥淥n the size of your balance sheet, what is your numerical estimate on where it will be at the end of September once the runoff is complete?鈥欌��
In response, Cramer said: 鈥淲e are watching Brexit carefully and hoping it can be resolved in an orderly way. From our standpoint, we have been involved in supervising our financial institutions that are active in the EU and UK to make sure they鈥檙e ready for the full range of possible outcomes to Brexit.鈥�
鈥淚n doing so, we have also worked alongside regulators from the EU and UK. We do hope that can be resolved well. Our banks are resilient and capitalised for different types of events.鈥�
Responding to the balance sheet question, he added: 鈥淭he balance sheet will be of a size of approximately 17 percent of Gross domestic product (GDP) around the end of this year down from 25 percent of GDP at the end 2014, so it is a significantly smaller number related to GDP than it was. For the size of the balance sheet, it looks like it will be a bit above 3.5 trillion.鈥�
In the Fed鈥檚 press conference opening remarks, chairperson, Jerome Cramer, said: 鈥淲e have noted some developments at home and around the world that bear close attention. Given the overall favourable conditions in our economy, my colleagues and I will be patient in assessing what, if any, changes in the stance of policy may be needed.鈥�
He explained that the US economy is in a good place and the Fed continues to expect that the American economy will grow at a solid pace in 2019, although likely slower than the very strong pace of 2018. Cramer added that they believe that their current policy stance is appropriate.
In his opening remarks he cited: 鈥淪ince October 2017, we have been allowing our asset holdings to decline by not reinvesting all of the payments we receive as securities matured or were prepaid.鈥�
鈥淭oday [20 March], we announced that we intend to slow the runoff of our assets starting in May, and to cease runoff entirely in September of this year.鈥�
Cramer continued: 鈥淚n September, reserve balances may still be somewhat above the level required to conduct policy efficiently and effectively. If this is so, we may hold the size of our asset holdings roughly constant for a time.鈥�
During this time, ongoing gradual increases in currency and their other non-reserve liabilities would imply very gradual declines in reserve balances, Cramer revealed.
According to Cramer, when the committee judges that reserves should not decline further, securities holdings will again begin to rise, as dictated by the growth of demand for their reserve and non-reserve liabilities.
The Fed believes that these plans will facilitate a predictable, transparent, and smooth process, and will make additional adjustments if conditions warrant, it was asserted.
Cramer highlighted: 鈥淭he committee will soon turn to a few remaining normalisation topics, including the desired maturity composition of our portfolio of treasury securities, and they maintain their long-stated intention to return to a portfolio consisting mainly of treasury securities.鈥�
鈥淭hus, we always emphasise that the interest rate projections in the simplified employee pension are not a committee decision. They are not a committee plan. As chair Yellen noted some years ago, the Federal Open Market Committee statement, rather than the dot plot, is the device that the committee uses to express its opinions about the likely path of rates.鈥�
鈥淭oday, the committee released revised balance sheet normalisation principles and plans. We have long said that the size of the balance sheet will be considered normalised when the balance sheet is once again at the smallest level consistent with conducting monetary policy efficiently and effectively.鈥�
鈥淲e have sought to make the normalisation process transparent, predictable, and gradual in order to minimise disruption and risks to our dual mandate objectives.鈥�
In a question to the chair, one member of the press asked: 鈥淲ith a new dot plot today, you鈥檝e gone from two rate hikes in 2019 to zero. You still have one joined for next year. The Feds funds futures trading that has been alluded to has been showing great cuts at the end of this year. Is that a possibility in your mind?鈥�
Cramer replied: 鈥淭he data that we are seeing is not currently sending a signal which suggests moving in either direction, which is why we are being patient. We feel our policy rate is in a range of netural, economy rate is growing in trend, inflation is close to target and employment is under 3 percent. It is a great time for us to watch and wait and see how things evolve.鈥欌��
Meanwhile, on the topic of Brexit, another audience member said: 鈥淭here is huge uncertainty at the moment over Brexit negotiations, how much of a factor has this been to the Feds in terms of patience to monetary policy and what is your base case on that?鈥�
鈥淥n the size of your balance sheet, what is your numerical estimate on where it will be at the end of September once the runoff is complete?鈥欌��
In response, Cramer said: 鈥淲e are watching Brexit carefully and hoping it can be resolved in an orderly way. From our standpoint, we have been involved in supervising our financial institutions that are active in the EU and UK to make sure they鈥檙e ready for the full range of possible outcomes to Brexit.鈥�
鈥淚n doing so, we have also worked alongside regulators from the EU and UK. We do hope that can be resolved well. Our banks are resilient and capitalised for different types of events.鈥�
Responding to the balance sheet question, he added: 鈥淭he balance sheet will be of a size of approximately 17 percent of Gross domestic product (GDP) around the end of this year down from 25 percent of GDP at the end 2014, so it is a significantly smaller number related to GDP than it was. For the size of the balance sheet, it looks like it will be a bit above 3.5 trillion.鈥�
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