Dovish Fed Promises to be ‘Patient” with Monetary Policy

“The case for raising rates has weakened somewhat,” Powell said during a news conference following the central bank’s two-day Federal Open Market Committee meeting.
James Hyerczyk
U.S. Federal Reserve

Federal Reserve Chairman Jerome Powell set off a volatile reaction in the financial markets on Wednesday when he stated strongly that the central bank has changed its tone regarding future interest rate hikes.

“The case for raising rates has weakened somewhat,” Powell said during a news conference following the central bank’s two-day Federal Open Market Committee meeting.

Prior to the news conference, the FOMC decided to leave its benchmark interest rate target unchanged at 2.25 percent to 2.5 percent. This move was widely expected.

However, it was the remarks from Powell in his news conference that fueled a volatile reaction across the board. In its monetary policy statement, the committee continued to vow to take a “patient” approach toward further rate increases. Powell went on to say that the funds rate is “in the committee’s” range of a neutral rate estimate. Reaching this key Fed measure strongly suggests the central bank may take a pause in further rate hikes.

In noting the changes in this Federal Reserve monetary policy statement from the one released in December, the central bank removed reference to “further gradual increases” to the overnight rate, a signal some considered a sign it will slow the pace of rate hikes.

Powell didn’t implicitly say the central bank would take a pause in rate hikes, however, he did indicate the next hike would be based on increased inflation. “I would want to see a need for further rate increases,” Powell said Wednesday. However, inflation would be the key to any further tightening by the central bank.

The Fed also touched on concerns over geopolitical issues like the ongoing Brexit negotiations and an economic slowdown in China with Powell saying the central bank can take its time before additional rate moves. “Today, the FOMC decided that the cumulative effect of those developments … warrant a patient wait-and-see approach regarding future policy changes,” Powell added.

After the Fed statement and Powell’s remarks, the futures markets continued to price in no further tightening while indicating a small chance for a rate cut over the next year. Overall, the Fed statement and Powell’s remarks were dovish, igniting a strong rally in U.S. equity markets while driving Treasury yields lower. The latter crushed the U.S. Dollar against the major currencies because it made the greenback a less-desirable asset.

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