US Fed leaves rates unchanged; warns coronavirus could hurt US

The United States Federal Reserve held interest rates steady on Wednesday at its first policy meeting of the year, with officials pointing to continued moderate US economic growth and a “strong” job market.

“Job gains have been solid … and the unemployment rate has remained low,” the Fed’s policy-setting committee said in a statement announcing its unanimous decision to maintain the key overnight lending rate in a range of between 1.50 percent and 1.75 percent.

The Fed’s statement was little changed from the one issued after its December meeting, saying that the current federal funds rate was “appropriate to support sustained expansion of economic activity”, including ongoing job growth and a rise in inflation to the central bank’s two percent target.

The Fed did not specifically mention economic risks arising from the recent coronavirus outbreak in China, which has led to fears of a further slowdown in the world’s second-largest economy. 

However, addressing a press conference, Powell warned that not only would the coronavirus likely hit China’s economy, but that it could also spill over into the US. “There will clearly be implications at least in the near term for Chinese output,” he said.

The Fed did not give new guidance about its current practice of buying $60bn monthly of US Treasury bills to ensure adequate short-term liquidity in bank funding markets. That programme will remain in place at least into April, while a related offering of repurchase agreements will continue at least through April.

Fed policymakers have been discussing how and when to end the temporary Treasury bill purchases, which have been under way since October, and what sort of permanent replacement it could use to ensure the central bank keeps control of the federal funds rate.

Yields on US Treasury securities were little changed after the Fed’s statement, while benchmark US stock market indexes ticked up to the day’s highs. The dollar held on to its gains against the euro and yen.

In a related decision, the Fed raised the interest it pays banks for excess reserves by five basis points to 1.60 percent, a technical adjustment officials say was needed to keep the federal funds rate around the middle of the target range.

The interest rate decision was widely expected; recent economic data shows the US economy on track for continued growth. There are no signs that US inflation is rising fast enough to pose a risk that the Fed might need to counter with higher borrowing costs to slow the economy.

“The vote was unanimous. That implies that the Fed is going to stay on hold here,” Cardillo said. “Of course they always leave the door open.”

The Fed cut rates three times last year to bolster an economy buffeted by trade wars, and has set a high bar for any further rate changes. Fed Chair Jerome Powell has said a “material reassessment” of the economic outlook would be required for any shift.

The Fed’s assessment of household spending was marked down slightly from a “strong pace” in its December statement to a “moderate” pace. The Fed also noted that business fixed investment and exports “remain weak.”