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Fed likely to hold interest rates steady: Analysts

By SCOTT REEVES in New York | China Daily Global | Updated: 2020-01-28 02:05

The US Federal Reserve is likely to hold interest rates steady when it meets Tuesday and Wednesday in Washington, analysts believe.

The economy is strong and US-China trade dispute that roiled the economy last year has been calmed by the signing of a Phase One trade deal earlier this month.

As a result, the Federal Open Market Committee (FOMC) is likely to leave the federal funds rate at its current target level of 1.50 to 1.75 percent. The rate determines what banks charge each other for overnight lending, but also affects the cost of consumer debt and therefore influences spending.

The Fed is scheduled to announce its decision Wednesday.

"Economic conditions have changed little since the FOMC met in December, while financial conditions have eased significantly further," New York investment bank Goldman Sacks said in a research note to investors issued last week. "We expect minimal changes to the statement and for the policy guidance section to remain unchanged."

The Fed had raised rates nine times since December 2015. But in 2019, the Federal Reserve cut interest rates by one-quarter point in July, September and October amid slower US growth and fears of a global economic slowdown. However, notes of the deliberations released after the meeting showed some FOMC members disagreed with the action and saw no reason to cut rates.

In December, Fed Chairman Jerome Powell said the cuts had brought interest rates to an "appropriate place." This month, analysts believe he will face no challenges to leaving rates at current levels for the foreseeable future.

"Beyond the January meeting, we see a high bar for policy moves in either direction, and we expect the funds rate to remain unchanged in 2020," Goldman Sachs analysts David Choi and Jan Hatzius said in a research note.

"Comments from Fed officials suggest wide agreement that the policy rate is likely to remain unchanged for a while, and we expect this meeting to further cement the Fed policy outlook as firmly on hold."

Inflation remains below the target of 2 percent annually. This is good news for small savers because it means inflation won't erode returns and yields on certificates of deposit and savings account probably won't go much lower in the immediate future.

For businesses, it means the cost of borrowing remains low and predictable. The Fed hopes low rates will spur investment, expand the economy and create new jobs. US employment is near record levels — and President Donald Trump is expected to tout the strong economy during his re-election bid this year.

Steady rates are good for the stock market in part because winning investments offer higher returns than bank CDs or bonds. But prolonged low inflation might keep the public expectation low and this could make it harder for the Fed to get back to its 2 percent target, the Goldman Sachs analysts warned.

"We continue to believe the Fed will formally adopt some form of average inflation targeting, most likely a 'fuzzy' version which formalizes the committee's desire to have inflation run modestly above 2 percent in the strong part of the business cycle, but stops short of a mechanical commitment to make up for below-target misses."

The Federal Reserve, the US central bank and an independent agency, was created by Congress to provide the nation with a stable monetary system that fosters economic growth.

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