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Fed Delivered Message with Dovish Tweak, Remaining Concerned about Low Inflation

FOMC left the Fed funds rate unchanged at 1.50-1.75% as widely anticipated. The accompanying statement contained few changes which were skewed to a mildly dovish side. Given the Fed’s dissatisfaction over weak inflation and uncertainty over global growth, the market has now priced in over 80% that the Fed would lower interest rate by at least once this year.

Assessments of economic developments were largely the same as the month ago. The members acknowledged “moderate” growth in the economy. Meanwhile, the job market remained “strong” with “solid” increase in payrolls and “low” unemployment rate. However, they suggested that “household spending has been rising at a moderate pace”, compared with “strong pace” noted in December.

The FOMC indicated that the current monetary policy stance remained “appropriate” to support “sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric +2% objective”. The language concerning inflation has been tweaked. In December, the members noted that the monetary policy aimed at support “inflation near the Committee’s symmetric +2% objective”. At the press conference, Chair Jerome Powell admitted that he is “not satisfied with inflation running below +2%”. Regarding the change in language, he suggested that the Fed aimed at underscoring that “+2% is not a ceiling.

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As we had expected, the Fed increased the IOER and RRP higher by +5 bps so as to push the Fed funds rate closer to the midpoint of the target range. On asset purchases, the Fed started buying $60B/ month of Treasury bills late last year. It has also been providing liquidity through both overnight and term OMOs was successful in stabilizing conditions in money markets. Powell indicated that T-bill purchases will be gradually tapered once the level of bank reserves exceeded US$1.5 trillion. We expect the size will be trimmed by half to US$ 30B in 2Q19.