Saturday, July 4, 2020

Federal funds rate maintained as uncertainty increases

By on June 19, 2019

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Vote on key rate that influences loans saw one FOMC member dissent

SAN JUAN — The Federal Reserve said Wednesday that since the Federal Open Market Committee (FOMC) met in May, it 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,” thus decided to maintain the target range for the federal funds rate at 2.25% to 2.5%.

Despite information indicating that the U.S. labor market remains strong and that economic activity is rising at a moderate rate, as job gains have “been solid, on average, in recent months, and the unemployment rate has remained low,” the FOMC said uncertainty about the outlook has increased.

“Although growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed,” the Fed said of economic projections after its two-day meeting.

The FOMC added: “In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,” and that to determine “the timing and size of future adjustments,” it “will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective,” taking into account such information as “labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

Of the 10 committee members, including Chairman Jerome Powell, all voted in favor of the policy action, except for James Bullard, “who preferred at this meeting to lower the target range for the federal funds rate by 25 basis points,” according to the Fed’s statement.

In its statement, the Fed “removed a reference to being ‘patient’ about adjusting rates,” the Associated Press noted, adding it suggests the FOMC is “now inclined to begin cutting rates for the first time in more than a decade. It remains unclear, though, when that might happen.”

The president & CEO of Puerto Rico-based corporate advisory firm Birling Capital, Francisco Rodríguez-Castro, who is also a Caribbean Business columnist and contributor, said investors should remain vigilant.

“The Fed is absorbing the most recent economic data, which has shown reduced job growth, reductions in consumer confidence, the effects of the trade war with China and its impact to the U.S. economy and the overall weakness that ensues; this scenario has strengthened the case for rate cuts, the question is when?” Rodríguez cautioned.

He added that he believes the market has already “factored in” the possibility of a rate cut by July, stressing it would be “imprudent to assume that a 100 percent chance of a rate cut may happen in July, especially since the Fed will begin its usual information quest to support or not any rate cut.”

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