Skip to main content

Fed Holds Line on Rates, Though Watching Coronavirus Impact

The Federal Reserve left its benchmark fed funds unchanged, though it is keeping a close eye on how the coronavirus potentially impacts the global economy.

The Federal Reserve opted to leave benchmark interest rates unchanged, as expected, at the conclusion of its two-day meeting on Wednesday as officials continue to monitor for signs that last year's interest rate cuts are beginning to have an effect.

However, it is keeping a weary eye on developments overseas, particularly the spread of the coronavirus and its impact on global economic growth.

In a unanimous decision, the Fed's interest rate-setting policy committee, called the Federal Open Market Committee, opted to leave the benchmark fed funds rate unchanged in a range of between 1.5% and 1.75%. 

In its statement, the FOMC pointed said the labor market "remains strong and that economic activity has been rising at a moderate rate." However, the committee also noted that while household spending has been rising at a moderate pace, "business fixed investment and exports remain weak."

"On the Fed front, no news is good news," said Mike Loewengart, vice president of investment strategy with E*Trade Financial. "And more importantly, it’s a unanimous decision to stand pat - a move we don’t often see by all Fed officials. 

"They’ve committed to a laissez-faire approach in 2020 and it looks like they’re sticking to their guns." 

The Fed in late October cut the rate by a quarter-percentage point, the third cut in a row, amid growing uncertainty that the U.S. economy could and would continue to hold forward momentum in light of slowing growth elsewhere in the world.

Since then, the opposite has occurred, with robust consumer spending and retail sales and blockbuster employment all signalling the U.S. economic expansion remains intact, even as it moves towards its 11th straight year of uninterrupted growth.

At least until a week or so ago, when spreading infections and rising deaths related to the coronavirus began to surge, prompting China to lock down cities and shutter transportation during the Chinese lunar new year holiday, and other countries to invoke  measures to screen those who may have carried the virus elsewhere.  

"Uncertainties about the outlook remain, including those posed by the new coronavirus," Powell said in at the post-meeting press conference.

At the current juncture, however, the Fed sounded positive, noting that the committee "...judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2% objective," the FOMC said in its statement.

Stocks extended gains following the rate announcement, with the S&P 500 hitting session highs on optimism that the Fed will continue to stay the course on monetary policy.

In terms of the Fed's efforts of providing temporary liquidity to the U.S. financial system, Powell noted the central bank's repo operations - which have swelled the central bank's balance sheet to some $4-plus trillion over the past few months - are working, and will be slowly cut back in the coming months.

"As bill purchases continue ... the role paid by active repo operations will recede," Powell said. "Over the first half of this year, we intend to adjust the size and pricing of repo pricing as we transition away from active use in supplying reserves."