- Fed Chairman Jerome Powell said the Fed would like to see a move in inflation that is significant and persistent before it raises interest rates again.
- The Fed held rates steady and signaled it was on hold with no intention now of moving off the sidelines, unless there is a surprise change in the outlook.
- The developments in trade talks in the next several days, with the Dec. 15 tariff deadline looming, could be an event that could change the Fed's position, if it alters the outlook for the economy.
- Powell said the Fed does not respond to headlines on trade developments.
Federal Reserve Chairman Jerome Powell made it clear the central bank will not move on interest rates unless it sees a significant and persistent move in inflation, which has been stubbornly below the Fed's target.
Markets took Powell's comments as dovish, meaning the Fed is leaning toward an easing policy and keeping interest rates low rather than a tightening policy, or raising interest rates. Stocks were slightly higher and Treasury yields were slightly lower. The Dow ended the day with a gain of 29 points, at 27,911.
The Fed left the fed funds rate range unchanged Wednesday at 1.50% to 1.75%. Both Powell's comments and Fed's statement indicated the Fed intends to remain sidelined for now, unless there's a development to change the economic outlook or a move in inflation.
"They want to be viewed as being in neutral. And in fact, he made it clear he thinks they're probably not really in neutral. They're still accomodative," said Ward McCarthy, chief financial economist at Jefferies. "The take away from that is the probability they're going to make any changes in policy for at least six months is very low, and it would take something quite significant for that to happen."
Economists say the outcome in trade talks between the U.S. and China could ultimately influence the Fed. They say it would quickly return to an easing stance if there's a big negative in trade talks or some other event that would change the economic and financial outlook. President Donald Trump set Saturday as a deadline for new tariffs on Chinese goods, unless there is a trade deal.
"If you do get improvements on the trade side, growth will pick up, inflation will pick up and they'll be happy to see both and they won't try to stop it," McCarthy said of the Fed.
While markets are laser focused on the Dec. 15 deadline, Powell said the Fed can't respond to trade headlines. "We look at a range of factors. We try to look through the volatility in trade news," he said, adding Fed officials do not set monetary policy based on the trade developments.
The Fed cut interest rates three times between July and October, before indicating it was stepping back. Economists say positive developments in the trade talks were one reason why the view on the economy improved, and the Fed's rate cuts also took pressure off the economy.
"The fears of whether we are already heading into a recession are gone," said Jon Hill, senior rate strategist at BMO.
He said the market had been worried about the potential for a hard Brexit for the U.K., but it does not seem that will be the outcome after the U.K. election this Thursday. The other fear, of course, had been that trade wars would hamper global growth and create a worldwide recession.
"How all this plays out a week from now will be entirely dependent on if we get a surprise in the U.K. election and what happens in the trade deal," said Hill. "This is just an appetizer for the main course."
Barring any negative surprises, the Fed can afford to hold policy steady even if inflation rises above its target at some point.
"They'd like inflation to go higher. We had a multi-generational strong labor market. We have all-time record highs in equities and we don't have accelerating inflation. Of course they'd like inflation to be slightly higher. The economy is in pretty good shape," said Hill.
The Fed issued new forecasts for the economy and interest rates Wednesday. The Fed forecasts now show no change in interest rates next year. Fed officials maintained their forecasts for the economy, with a projection for 2019 growth of 2.2% , followed in consecutive years by 2%, 1.9% and 1.8% gains.
"I think Powell wants to see how low unemployment can go, and the only number that's going to get the Fed to deviate from the projected rate path is a significant move in inflation, either to the upside or downside," said Drew Matus, chief market strategist at MetLife Investment Management. "It's allowed the Fed to take a step back, rather than take center stage. It feels like an end of an era."
Members cut their inflation expectations this year, though they see inflation finally hitting their 2% target in 2021. They now see the core personal consumption expenditures inflation measure up just 1.6% growth this year, down from the 1.8% projected in September. They kept their estimates at 1.9% in 2020 and 2% for the following two years.
"I think the most interesting aspect of the whole thing is how stable their outlooks are for the next few years. That level of stability is rare in the real world," said Matus. "What this is telling me is they're not expecting there's going to be a lot of surprises near term. And if there's no massive surprises in one direction or the other, they're not going anywhere. Those were insurance cuts we saw. They think they've taken out enough insurance and now they want to be left alone."