US Fed lowers key interest rate as 'insurance' against economic risks

WASHINGTON — The US Federal Reserve cut its benchmark interest rate for the third straight time on Wednesday but is likely to hold off before providing more stimulus as it gauges economic risks.

Though President Donald Trump's trade war with China and Brexit concerns have created uncertainties that have crimped business investment and undermined manufacturing, the American economy has remained "resilient," and monetary policy is now "in a good place," Fed Chairman Jerome Powell said.

The Fed's policy-setting Federal Open Market Committee lowered the policy interest rate by 25 basis points to a target range of 1.5-1.75 percent, as expected, pulling back another of the four interest rate increases it implemented in 2018.

"We took this step to help keep the US economy strong in the face of global developments, and to provide some insurance against ongoing risks," Powell told reporters.

Added to a key change in the language of the statement issued by the policy-setting Federal Open Market Committee, the comments cement the view the Fed is for now unlikely to cut rates again in the final meeting of the year.

Pressed to explain under what conditions policymakers would consider another dose of stimulus as appropriate, Powell said, "if developments emerge that cause a material reassessment of our outlook, we would respond accordingly."

He pointed to trade tensions and Brexit as factors crimping business investment and manufacturing but "overall we see the economy as having been resilient to the winds that have been blowing this year."

Given signs of a possible "phase one" trade deal with China and the diminished risk of a no-deal Brexit, "there is plenty of risk left but I would have to say the risks seem to have subsided."

KEY CHANGE IN WORDING

In a key edit to the prior statement, the Fed removed the pledge to "act as appropriate to sustain the expansion."

Analysts who scrutinize every phrase the Fed utters read that as a leaving the door open to a pause in the easing cycle.

"In other words, they think they have done enough for now and that further easings will be contingent on a material weakening in growth and/or inflation," said Ian Shepherdson of Pantheon Macroeconomics.

As President Donald Trump's trade war with China has hit manufacturing and created uncertainty that, together with concerns about Brexit, have slammed the brakes on investment, economists expected this move to help bolster a softening American economy.

But GDP in the July-September quarter was surprisingly solid, growing 1.9 percent, boosted by a strong housing sector and healthy consumer spending, according to data released earlier Wednesday.

US hiring continues and unemployment is low, while inflation is creeping up to the Fed's 2.0 percent target.

However, the trade war uncertainty also has hit the global economy, and the US data contained concerning signs as well, even as American consumers continue to carry the weight of the expansion on their backs.

Several recent surveys show about a third of economists believe the US economy could slip into recession in the next 12 months. All show the number has increased in recent weeks.

Esther George, head of the Kansas City Federal Reserve Bank, and Boston's Eric Rosengren both opposed the latest move, just as they voted against the previous two rate cuts.

Wall Street was cheered by Powell's remarks, with the S&P 500 swinging to a record close. Analysts said the Fed's messaging matched investor expectations.

source: news.abs-cbn.com

Fed minutes suggest rate hikes on hold until Brexit impact clearer

WASHINGTON - Federal Reserve policymakers decided in June that interest rate hikes should stay on hold until they have a handle on the consequences of Britain's vote on EU membership, according to the minutes of the Fed's June policy meeting released on Wednesday.

The minutes of the June 14-15 meeting, which took place ahead of the June 23 referendum in which Britons voted to leave the European Union, showed widespread unease over the so-called "Brexit" vote, including among voting members on the rate-setting Federal Open Market Committee.

"Members generally agreed that, before assessing whether another step in removing monetary accommodation was warranted, it was prudent to wait for additional data on the consequences of the U.K. vote," according to the minutes.

Worries have only intensified since the vote and Fed Governor Daniel Tarullo cited the rise in uncertainty on Wednesday when he argued for holding off on rate hikes until inflation had turned decisively higher.

At the June policy meeting, policymakers also cited a severe slowdown in hiring by U.S. employers as a reason for leaving interest rates steady last month, the minutes showed.

The Brexit vote shocked investors and triggered $2 trillion in losses in global stock markets the day after the referendum.

Anxieties remain, with global financial conditions tightening as investors anticipate it could take years before Britain and the EU agree to new rules on finance, trade and immigration.

On Wednesday, U.S. benchmark and long-dated Treasury yields hit record lows, with some investors betting the Fed would keep rates on hold through 2017.

"We would need to see a few months of good data ... to support a hike," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

The dollar, which has gained more than two percent against a basket of currencies since the Brexit vote and could weigh on U.S. exporters, weakened slightly following publication of the minutes.

Before the British vote, the Fed had signaled two interest rate hikes would likely be needed this year to keep the U.S. economy from eventually overheating.

But since the British referendum, several Fed policymakers have said the uncertainty warrants caution, including New York Fed President William Dudley who said on Tuesday the Fed needed to be patient on rate increases and that it was too soon to know the fallout from the British decision.

A severe slowdown in hiring during May and weak business investment even outside the sagging energy sector had raised questions about the U.S. outlook even before the Brexit vote.

Still, in the minutes of the June meeting, many Fed policymakers who participated in the policy discussion stressed the sharpness of the hiring slowdown could be statistical noise, and most argued the economy would be ready for rate increases unless a financial or economic shock knocks America off course, according to the minutes.

Since the Brexit vote, the British pound has plunged 13 percent against the dollar, including a 1 percent decline on Wednesday, and investors and policymakers are watching out for further signs of financial stress that could hit economic growth in America and worldwide.

"None of us really knows the magnitude and I doubt there will be a moment when people say Brexit is done," Tarullo said on Wednesday. "There is a good bit of uncertainty."

source: www.abs-cbnnews.com

Fed keeps rates unchanged, wary eye on global markets

WASHINGTON - The U.S. Federal Reserve kept interest rates unchanged on Wednesday and said it was "closely monitoring" global economic and financial developments, signaling it had accounted for a stock market selloff but wasn't ready to abandon a plan to tighten monetary policy this year.

The decision by the central bank's rate-setting committee was widely expected after a month-long plunge in U.S. and world equities raised concerns an abrupt global slowdown could drag on U.S. growth.

Fed policymakers said the economy was still on track for moderate growth and a stronger labor market even with "gradual" rate increases, suggesting its concern about global events had diminished but not squashed chances of a rate hike in March.

"The committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation," the Fed said in its policy statement following a two-day meeting.

Wall Street fell after the statement, with the Standard & Poor's 500 index closing down more than 1 percent. Prices for U.S. Treasuries were mixed, while the dollar extended losses against a basket of currencies.

In an indication the Fed was taking global risks seriously, a prior reference to the risks to the economic outlook being "balanced" was removed from its statement. Instead, it said it was weighing how the global economy and financial markets could affect the outlook.

"It is clear that several FOMC members have become more worried," said Harm Bandholz, an economist at Unicredit in New York, referring to the Fed's rate-setting Federal Open Market Committee.

Shrugging off economic weakness in China, Japan and Europe, the Fed last month raised its key overnight lending rate by a quarter point to a range of 0.25 percent to 0.50 percent and issued upbeat economic forecasts that suggested four additional hikes this year.

Wall Street's top banks, however, expect only three rate increases before the end of the year, according to a Reuters poll released after the Fed's statement on Wednesday. That was in line with expectations earlier in January.

Investors are betting on one quarter-point rate increase in 2016.

Prices for Fed funds futures on Wednesday showed traders had pushed back bets for the next rate hike to July from June and modestly trimmed bets on a March hike.

"The Fed has maintained its composure in the face of global pressures," said Joe Manimbo, an analyst at Western Union Business Solutions.

JOB GAINS

U.S. exports took a hit last year, largely due to the impact of a strong dollar, but consumer spending accelerated and overall employment surged by 292,000 jobs in December.

The Fed said on Wednesday that a range of recent labor market indicators, including "strong" job gains, pointed to some additional firming in the job market.

Oil prices have also plummeted this year, which could keep U.S. inflation below the Fed's 2 percent target for longer, but the central bank said it still expects the downward inflationary pressure from lower energy and import prices to prove temporary.

Policymakers will be able to sift through the January and February U.S. employment reports before their next policy meeting in March.

source: www.abs-cbnnews.com