The Federal Reserve signaled that it’s past three-year drive in tightening monetary policy might be at an end due to the cloudy outlook of the U.S. economy due to impasses over trade, global headwinds, and government budget negotiations. By keeping interest rates steady, the U.S. central bank discarded its earlier promises of a further increase in interest rates. It also stated on Wednesday that it would be patient before making any new changes.
Jerome Powell, Federal Reserve Chairman, said that the case for increasing interest rates had weakened due to the events of recent weeks which included the U.S. government shutdown that lasted for 35 days. According to Powell, the current picture is slightly contradictory to the strong U.S, macroeconomic performance. Using common sense in risk management suggests waiting till there is more clarity. Although Powell expects continued growth of U.S. economy, he seems to be less certain now than a month ago when the Federal Reserve stated that they expected faster growth just as likely as a sharp downturn.
These comments by Powell, make the Federal Reserve’s balance sheet appear larger than expected. The two-day meeting held by the Federal Reserve may mark an anticlimactic end to its long battle in trying to normalize monetary policy since the financial recession and crisis in 2007 to 2009. With the current Fed rate between 2.25 and 2.5 percent, well below historical averages, the Federal Reserve will find it extremely difficult to battle future downturn with only rate cuts.
This also raises the question of whether the change in the Fed’s stance is a response to pressure from President Donald Trump or the volatile financial markets. Trump has been attacking the Fed repeatedly for the rising rates, arguing that it was affecting the economic growth of the country.
Powell used the new regimen of press conferences being held after every policy meeting to keep stressing on the touchy changes and also insisting that the Fed was reacting to economic data alone and not any other pressure. Powell also stated that the Fed has adopted a wait and see approach rather than putting a complete stop to rate increases.
Powell also made it clear that the Federal Reserve is in no rush after it has been raising interest rates almost every quarter for the past 2 years. Taking this statement along with balance sheet into account, this gives a certain amount of flexibility to the Central bank according to investors. Some critics stated that this might result in the central bank to become a source of turbulence in the market.
