Fed Holds Line on Rates--And May Keep It That Way

Mike Sorohan msorohan@mba.org

March 21, 2019

The Federal Open Market Committee, as expected, held the federal funds rate following its policy meeting yesterday and hinted that it might be done raising rates for a while.

In keeping the target range for the federal funds rate at 2-1/4 to 2-1/2 percent, the FOMC said it would be "patient" as it determines what future adjustments to the target range for the federal funds rate may be appropriate.

"This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments," the FOMC said.

Mortgage Bankers Association Chief Economist Mike Fratantoni said the Fed action was not unexpected.

"The job market is quite strong, and even though wage growth has accelerated, inflation has not picked up and shows no signs of doing so," Fratantoni said. "With that combination, Fed officials are comfortable leaving rates at their current level. If inflation were to increase, they might be forced to hike again, but it appears that we are at the end of the rate hiking cycle."

The bigger news from this meeting, Fratantoni said, was the "clear signal" that the Fed would stop allowing their balance sheet to shrink and would begin to allow it to grow again starting this fall.

"Fed officials have noted that they would like to return the balance sheet to primarily Treasury assets, meaning that [mortgage-backed securities] will continue to roll off, with the proceeds being invested in Treasury securities," Fratantoni said. "The Fed also noted the potential to sell ‘residual holdings' of MBS at some point, but that they would give plenty of notice before doing so. Over time, these changes could put some upward pressure on mortgage-Treasury spreads--and ultimately--mortgage rates."

The FOMC statement appears below:

"Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren."

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