The Federal Open Market Committee on Wednesday kept policy on hold.
Most Fed watchers expected that outcome, saying that the committee would be keen to see more details from the Trump administration's proposed fiscal policies before making a move.
But notably, in the accompanying press release, the committee pointed to the improving business and consumer sentiments after the US presidential election.
The improvements in these indicators were largely due to companies' and consumers' expectations for the economy. And so some argued ahead of the decision that the FOMC would want to see whether those expectations translated into increases in spending and hiring before raising rates.
"[B]y the March FOMC meeting, we should have a better sense of the degree to which recent improvements in business and consumer sentiment are affecting economic activity," Lewis Alexander, chief US economist at Nomura, wrote in a note to clients before the announcement.
On the fiscal-policy front, President Trump pledged to cut taxes for corporations and to invest about $550 billion in infrastructure. Wall Street had previously argued that these steps would encourage economic growth and inflation while supporting company earnings. Stocks surged after the election to new highs, and the Dow crossed the psychologically important 20,000 mark in January. (Although it is now again below that level.)
"Following its rate hike at last December's meeting, we expect the Fed to stay in wait-and-see mode until it has more clarity on the magnitude, composition, and timing of the anticipated fiscal stimulus," Capital Economics' Paul Ashworth wrote in a note to clients ahead of the statement.
At its meeting in mid-December, the FOMC raised its benchmark interest rate by 25 basis points, to a range of 0.50% to 0.75%. That marked the second rate hike in the past decade.
FULL PRESS RELEASE:
Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate stayed near its recent low. Household spending has continued to rise moderately while business fixed investment has remained soft. Measures of consumer and business sentiment have improved of late. Inflation increased in recent quarters but is still below the Committee's 2 percent longer-run objective. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will rise to 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
