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Fed to signal rates will be on hold for much of 2020

The Fed chairman Jerome Powell affect gold price

The Federal Reserve is expected to leave interest rates unchanged later this week, and signal it plans to continue this policy for much of 2020.

Investors believe the central bank’s Federal Open Market Committee will leave rates at between 1.5 per cent and 1.75 per cent at the end of its two-day meeting on Wednesday in Washington, led by Fed chairman Jerome Powell (pictured).

This key rate affects the cost of personal loans, credit card rates, as well as the price of loans and bonds to large corporations and small firms.

The number two at the Fed Richard Clarida said in a speech this month that both the economy and policy are “in a good place”, in tune with what its key officials have said for several months.

 

‘Global developments’

The central bank has signalled it does not intend to move again for perhaps the whole of 2020 unless the economy gets significantly and unexpectedly worse. Powell said he was keeping an eye on “global developments” in December, widely taken to mean China’s slowdown and the UK’s ongoing Brexit negotiations.

“The Fed has been very clear in its communications that it is satisfied to maintain the status quo for an extended period of time,” says Kristina Hooper, chief global market strategist at Invesco.

The central bank cut interest rates nine times between 2015 and late 2018 — three of which have been reversed since July last year — as the body sought to guard the American economy against US-China trade tensions and slowing global growth. It also began expanding its balance at a rate of $60bn a month in Treasury bill purchases in October.

Inflation remains tame, lifting 0.2 per cent last month, leaving consumer price inflation in December at 2.3 per cent.

 

‘Inflation modest’

William Spriggs, chief economist at the American Federation of Labor and Congress of Industrial Organizations, said: “Inflation remains very modest, and employment growth has remained just enough to keep the unemployment rate flat.”

However, some market observers say the Fed may be in the mood to give back those rate reversals in the second half of 2020. This follows the signing of Phase One of the US-China trade deal as well as a new North American agreement, which were both signed earlier this month.

US President Donald Trump has repeatedly called for rate cuts from the Fed. Last week Trump said US growth would have been “close to 4 per cent” last year had the central bank not raised rates three times. He was speaking at the World Economic Forum in Davos, Switzerland.

Data for the full year isn’t in yet, but the US economy looks to have expanded at between 2.2 per cent and 2.3 per cent compared to the fourth quarter of 2018.

 

Trump tensions

Most economists agree with Trump that the Fed’s rate hikes reined in business investment and the housing market, but not by anywhere near the almost 2 per cent effect on national growth the President suggests. Observers add that trade tensions Trump was at the centre of last year also weighed on business sentiment and investment.

A solid economy and a rising stock market are two of Trump’s most significant domestic achievements, as the country faces Presidential elections in November.

The Fed has a mandate from the US Congress to promote maximum employment and stable prices.

The US central bank’s policy has an impact on global financial markets by affecting currency exchange rates, interest rates and international flows of investment money.

The US is a key export market for most countries – for many, the largest of all. Around three-quarters of exports from Canada and Mexico go to America. The US accounts for about 13 per cent of UK exports. Around 60 per cent of all the world’s international debt is held in dollars.

 

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Roger Baird

Roger Baird is News Editor at Finixio. He has worked as a financial journalist for 20 years reporting on companies, capital markets and the UK economy.