The Federal Reserve kept interest rates flat on Jan. 29 and reiterated its intentions to stay on the sidelines this year, saying rates are at an appropriate level to support continued expansion in the U.S. economy.
The Fed's monetary policy stance will "likely remain appropriate" as long as officials do not see a "material reassessment" of their economic outlook, Fed Chairman Jerome Powell told reporters following the central bank's rate decision, which kept the benchmark federal funds rate at a target range of 1.5% to 1.75%.
On that front, Powell said there are reasons for "cautious optimism" about the outlook for the global economy, pointing to a recent easing of trade tensions along with signs that weakness in the manufacturing sector has bottomed out. But he noted that "none of this is assured" and said the U.S. economy continues to face some of the same downside risks that prompted the central bank to lower rates three times in 2019.
"Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly. Policy is not on a preset course," he said.
The latest such risk getting market attention is the possible economic fallout of the coronavirus, which has infected roughly 6,000 people and killed more than 130 people.
While Fed officials made no mention of the coronavirus in the Federal Open Market Committee statement, Powell said the central bank is "very carefully monitoring the situation" and its potential macroeconomic effects on China and the broader global economy.
One key issue that helped prompt the Fed's 2019 rate cuts — trade tensions between the U.S. and China — has ebbed in recent weeks after both countries reached a "phase one" trade agreement. In another sign that trade uncertainty may be easing, President Donald Trump signed the new North American trade deal after it passed the U.S. Senate, leaving Canada's approval of the United States-Mexico-Canada Agreement as the sole remaining step in the process.
Both bits of news are "potentially positive things for the economy, without question," Powell told reporters. Still, he added, trade uncertainty remains elevated overall and there will likely be a bit of a "wait-and-see attitude" on new business investments as companies figure out the new environment and the agreements get implemented over time.
"I would say we need to be a little bit patient about the effect on the economy," Powell said.
Though dinged by the effects of trade uncertainty and weaker global growth, U.S. GDP has kept steadily growing, rising by 2.1% in the third quarter of 2019. The Bureau of Economic Analysis' first estimate of GDP growth during the fourth quarter of 2019 is due out Jan. 30.
The U.S. consumer sector has been driving much of the economy's growth in recent months, though Fed officials said in the FOMC statement that household spending rose at a "moderate pace" in recent weeks, a downgrade from their earlier characterization of the sector as "strong."
The FOMC statement continued to flag the underperformance of inflation and "muted inflation pressures," while also noting that market-based measures of inflation expectations "remain low."
The Fed's preferred gauge of underlying inflation, the core personal consumption expenditures index, rose by 1.6% year over year in November and remains below the Fed's 2% goal.
Fed makes IOER tweak and lays out balance sheet plan
The Fed also provided updates on the future of its roughly $4.15 trillion balance sheet and the financial plumbing issues that popped up in mid-September, when a lack of liquidity caused a spike in short-term borrowing rates.
In one notable change, the Fed moved up the interest rate it pays banks on their excess reserves to 1.60% from 1.55%. The change to IOER is aimed at nudging up the effective fed funds rate by a similar amount and ensuring it trades closer to the middle of its 25-point target range. Analysts viewed the change to the IOER rate as a possibility and noted it would be aimed at dealing with technical issues, rather than reflecting a change in the Fed's monetary policy stance.
Powell also previewed potential changes to the Fed's ongoing effort to add reserves to the banking system. The Fed has been doing so through repurchase agreements that add reserves on a temporary basis as well as through monthly purchases of Treasury bills worth roughly $60 billion that boost reserves on a more permanent basis.
The Fed plans to gradually curtail its repo purchases as the monthly T-bill purchases play a larger role in the coming months, though officials expect repo operations to continue through April 2020 to ensure bank reserves stay stable during tax season.
At some point, Powell added, there will be enough reserves back into the system to begin gradually trimming Treasury bill purchases as well.
Fed officials are aiming to bring reserves back to levels that are "no lower" than they were in early September, pegging $1.5 trillion in bank reserves as the likely bottom end of the range the Fed will target going forward.
"We're committed to making this adjustment process a smooth one," Powell said. "We'll provide more details as we go, and we expect to learn as we go, as we always have, and we're prepared to adjust the details of the plan as necessary to foster efficient and effective monetary policy implementation."
