Fed Chairman Jerome Powell Moves from Hawkish to Patient on 2019 Rate Hikes

Jon C. Ogg

Wednesday marked one of the market days where the public was waiting to see what Federal Reserve Chairman Jerome Powell and his members of the Federal Open Market Committee (FOMC) would do with interest rates. It was widely expected that there would be no rate hike, and Wall Street has been tempering down expectations of the endless rate hikes due to a slower U.S. and global economy as 2018 turned into 2019.

It was the opinion of 24/7 Wall St. that as early as late November of 2018 that Jerome Powell finally blinked on the path for endless rate hikes. It’s not that the Fed won’t raise rates in 2019, but the notion that it will be at a far slower pace than in 2018. And to make matters even more complicated, the Fed seemed to have confirmed a “third mandate” beyond stable inflation and full employment.

Wednesday’s FOMC decision was a unanimous (10-0) vote to keep the targeted Fed Funds rate unchanged at the two-day FOMC meeting. What changed here is that the FOMC has removed its language about endless rate hikes. The wording removed its outlook for “further gradual increases in rates” to say that the FOMC “will be patient’ in deciding future interest rate changes. This follows prior weeks of sharp criticism by President Donald Trump that Mr. Powell was being too aggressive in rate hikes in 2018.

The Fed did maintain that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. While household spending has continued to grow strongly, the Fed pointed out that growth of business fixed investment has moderated from its rapid pace earlier in 2018. The Fed has its full employment picture for the most part, and overall inflation, as well as inflation for items other than food and energy, are near its 2% target. The FOMC decided to maintain the target range for the federal funds rate at 2.25% to 2.50%.

The FOMC’s major statement change was as follows:

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.

Being patient was not the case in 2018 while the economy was humming along. On an additional mandate, the FOMC did go beyond inflation and full employment. It said:

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.

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On top of the normal FOMC announcement, the FOMC has reaffirmed its ‘Statement on Longer-Run Goals and Monetary Policy Strategy’ that was adopted in January of 2012. The amended statement said:

The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

That amended statement also noted exceptions between the dual mandates of full employment and stable inflation. That portion said:

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate.

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Shortly before the FOMC announcement, the Dow was up 257 points at 24,837 and the yield on the 10-year Treasury was up 1.6 basis points at roughly 2.73%. The S&P 500 was also up by more than 20 points at 2,660.70.

About 15 minutes after the announcement, the Dow was up 404 points and the S&P 500 was up 37 points.