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Officials reinforce view that Fed is on hold for 2020


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Officials reinforce view that Fed is on hold for 2020

In separate appearances, two Federal Reserve regional bank presidents gave reassuring assessments of the strength of the economy and reinforced the view that the central bank is unlikely to change interest rate policy anytime soon.

With the effects of three rate cuts in 2019 still flowing through the system, "my view is that it is appropriate to take a patient approach to considering any policy changes, unless there is a material change to the outlook," Boston Fed President Eric Rosengren said in New York, according to the text of his speech.

"The U.S. economy is quite solid, and barring an unexpected adverse shock, my view is that the economy is currently well positioned for the coming year," he added.

At a separate event also in New York, Dallas Fed President Robert Kaplan said rates should stay where they are in 2020, according to Reuters.

Kaplan, who will join the Federal Open Market Committee as a voting member in 2020, said that the U.S. is "at or past full employment" but that pressure on inflation is likely to remain low, the news service reported.

That view is consonant with remarks given by Fed Chairman Jerome Powell after the central bank's rate-setting meeting earlier in December. Powell said that recent experience has shown that employment levels can stay strong without accelerating price increases and that he would like to see a demonstrable move in inflation toward the Fed's target of 2% before raising rates.

Rosengren, who voted against all three rate cuts this year and is rotating off the FOMC as a voting member in 2020, struck a slightly more hawkish note on inflation, saying that a shortfall in early 2019 may have reflected temporary factors and that the Fed's preferred inflation measure "should move in a narrow range around" the 2% target, given the strength of the labor market.

During the easing cycle, Rosengren expressed concern that rate cuts could fuel credit bubbles and argued that the Fed should wait for signs of a substantial economic slowdown.

Nevertheless, the FOMC was unanimous in its decision to hold its target for the federal funds rate steady at its meeting in December, and the vast majority of FOMC participants believe that the current range of 1.5% to 1.75% will remain appropriate in 2020, according to the Dec. 11 "dot plot."

Rosengren based his optimistic view of the economy in part on favorable trends in household savings and net worth that could help sustain consumption. He also said the inversion of the yield curve in 2019 may have given a false signal about the likelihood of a recession since inversions in the preceding two downturns were caused by Fed tightening, whereas monetary policy has remained accommodative recently despite rate hikes through the end of 2018.

Kaplan also addressed recent volatility in short-term money markets, according to The Wall Street Journal, saying that the situation will be "manageable" despite an array of year-end pressures, including balance sheet management maneuvers by large banks trying to avoid higher capital requirements.

The Fed has injected hundreds of billions of dollars into the overnight repurchase, or repo, market in an effort to prevent a dramatic spike in rates akin to what happened in September. Policymakers are also considering tweaks to liquidity rules that influence how large banks participate in the market.

JPMorgan Chase & Co., a major player in the repo market, said earlier in December that financing markets look stable going into the end of the year. For the near-term, "the Fed has said and done everything they need to do," CFO Jennifer Piepszak said during an investor presentation.

In a note on Dec. 16, strategists at BofA Global Research said they are "cautiously optimistic that funding pressures will remain relatively stable into the new year." They noted the large amounts of liquidity provided by the Fed and observed that balance sheet "window dressing" by large banks toward the end of 2018 had been concentrated in areas such as trading securities instead of direct interbank lending.