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Fed keeps rates flat, suggests it may be on extended pause

The Federal Reserve kept its benchmark interest rate steady at its last meeting of the year, pausing its run of rate cuts at three consecutive meetings and signaling little hurry to change rates again.

The target range for the federal funds rate will remain at 1.5% to 1.75%, the Federal Open Market Committee said in its post-meeting statement. The FOMC's quarterly "dot plot" projections also indicated that a broad majority of Fed officials are leaning toward keeping rates at that level in 2020.

"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 near the Committee's symmetric 2% objective," the FOMC statement said.

The Fed's economic outlook "remains a favorable one" despite continued risks that include slower global growth and trade policy uncertainty, Powell told reporters at a news conference. The FOMC statement removed prior language stating that "uncertainties about this outlook remain," though it noted that Fed officials would continue to monitor incoming information for any signs that the outlook is shifting.

The unanimous Fed decision was widely expected, given that Fed officials had signaled their three rate cuts this year left borrowing costs "well calibrated" to shield the U.S. economy against downside risks.

Those risks have been major factors behind a slowdown in U.S. business fixed investment and weakness in the manufacturing sector. The latter contracted in November for the fourth straight month, according to a monthly Institute for Supply Management survey.

But the labor market displayed few signs of a slowdown in November, with the latest U.S. jobs report showing the country added 266,000 jobs last month, far above economists' estimates. The report also revealed that the U.S. unemployment rate dipped to a 50-year low of 3.5%.

And U.S. consumers, who make up 70% of the U.S. economy, have continued to drive growth. U.S. GDP rose by 2.1% in the third quarter, according to revised data from the Bureau of Economic Analysis, which had earlier pegged third-quarter growth at 1.9%. The median projection from Fed officials indicates they see GDP growing by 2.2% for all of 2019 then dipping slightly to a 2% growth rate in 2020, unchanged from their September projections.

Forecasts suggest Fed may be on extended pause

Fed officials' quarterly projections revealed the central bank was largely united in potentially staying on the sidelines throughout all of 2020. Thirteen of them submitted projections suggesting they would lean toward keeping rates steady, while four officials penciled in one 25-basis-point hike for 2020. None of them projected a rate cut in 2020, though markets currently expect the central bank to ease policy at least once more next year.

Powell did not shut the door on that scenario, reiterating that the Fed would respond to any developments that "cause a material reassessment of our outlook." But the Fed's current policy stance "likely will remain appropriate" as long as the outlook does not see a major shift, he said.

"Policy remains on hold unless there is a material change to the outlook," Rubeela Farooqi, chief U.S. economist at High Frequency Economics, wrote in a note to clients.

In fact, the Fed projections indicated officials believe their next move is more likely to be a rate hike ⁠— but not until 2021. A majority of Fed officials saw at least one potential rate hike that year, with only five suggesting rates should stay flat over the next two years.

Still, Powell again cautioned against over-analyzing the dot-plot rate projections when the economy is at an inflection point.

He also said Fed officials see a "relatively low" risk that inflation will rise significantly above 2% if the Fed keeps rates low, a message underscored by "Fed Listens" sessions that the central bank has held around the country in which community groups have said the labor market has room to keep growing.

The Fed is facing a "very different" labor market today than it did in the 1990s, when the Fed twice opted for three rate cuts and then quickly raised rates again to guard against upward inflation pressures. Inflation is "barely moving up" today and remains below the central bank's 2% goal even though the unemployment rate is at a 50-year low, suggesting there is "actually more slack" in the labor market than officials once thought, Powell said.

"The need for rate increases is less, and by the way … it's a good thing," Powell said. "I think we've learned that unemployment can remain at quite-low levels for an extended period of time without unwanted upward pressure on inflation. In fact, we need some upward pressure on inflation to get back to 2%."

Asked whether the Fed should commit to keep rates unchanged until it reaches its 2% inflation goal, Powell said his personal view is that he would want to see a "persistent" and "significant" increase in inflation before raising rates.

While not all of Powell's colleagues may share his view, markets correctly "put much more weight on the views of the chair," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note to clients.

The U.S. core personal consumption expenditures price index, the Fed's preferred inflation gauge, increased by 1.6% year over year in October, according to the Bureau of Economic Analysis. Fed officials see core PCE inflation ending the year at 1.6%, down from their September projection that inflation would rise by 1.8% in 2019. They also see inflation moving back up to 1.9% in 2020 and returning to 2% in 2021.