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Fast Comment USFed leaves rates on hold and signals no rush for further hikes

  1. Fed leaves rates unchanged, as expected
  2. Fed signals no rush to hike rates; likely to hold rates steady until at least June, we believe
  3. We expect the Fed to deliver a final hike in June, with the next step to be rate cuts next year
Fed leaves rates unchanged, as expected
As widely expected, the Federal Reserve maintained the target range for the federal funds rate at 2.25-2.50 percent at the FOMC meeting that concluded today. The vote was unanimous. The meeting was not followed by an updated economic projection, so the communication was limited to the FOMC statement followed by a press conference as the Fed chairman began his new practice of speaking to the media after every policy meeting.
Fed signals no rush to hike rates; likely to hold rates steady until at least June, we believe
The most important change in the FOMC’s statement was that the committee adds that it will be "patient'' with regards to the rate outlook amid muted inflation and global developments, indicating the Fed is in no rush to hike rates. The Fed also changed prior language to make it clear it now stands ready to change its balance sheet policy if necessary. “The Committee is prepared to adjust any of the details for completing balance sheet normalisation in light of economic and financial developments,” it said. In short, the statement encouraged expectations for a pause in the rate-hiking cycle, pending more clarity. The balance sheet statement was relatively dovish as well, even though no changes were announced. All in all, the swing in tone means that it would now be a substantial stretch for the Fed to follow the pattern of gradual rate hikes from last year by raising interest rates again in March, in our view. The USD weakened on the news and bond yields are a touch lower.
We expect the Fed to deliver a final hike in June, with the next step to be rate cuts next year
A more statistically-minded Fed, faced with weaker global growth, more volatile financial markets and modest inflation prospects, will be patient about raising rates. Nevertheless, we think it is premature to conclude that the Fed is finished raising interest rates, as markets have done. The labour market is still strong and incoming data indicates solid GDP growth in the near future. We expect the Fed to implement a final hike in June. By that stage, we believe weaker growth will prompt the Fed to move to the sidelines, with the next step likely to be rate cuts in 2020.

Disclaimer
Anders Bergvall

Anders Bergvall

Senior Economist

Thematic analysis and USA

anbe83@handelsbanken.se

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