January 30, 2019 / 9:13 PM / 6 months ago

Breakingviews - Fed patiently tells market it will be patient

Federal Reserve Board Chairman Jerome Powell arrives at his news conference after the two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, U.S., June 13, 2018. REUTERS/Yuri Gripas

WASHINGTON (Reuters Breakingviews) - The Federal Reserve is trying to say the same thing another way. Stocks rose following the U.S. central bank’s comments reiterating that moves on the interest rate, which it left unchanged on Wednesday, depend on economic conditions. Ditto for the pace of shrinking its balance sheet. That’s nothing new, yet overly sensitive investors needed the reminder.

The statement from the Federal Open Market Committee sounded more dovish than the one in December. Notably, it said the central bank would be “patient” with any interest-rate hikes. But that’s because the economy has changed. Inflation is more subdued, and lower oil prices could push it down further. Consumer sentiment in January fell to the lowest level since President Donald Trump was elected, according to the University of Michigan index released earlier this month. The compilers blamed the U.S. government shutdown, which lasted for 35 days, a global economic slowdown, and tariffs, among other things.

In his briefing, Chairman Jerome Powell reiterated the Fed’s patience and said a “wait and see” policy is warranted. He said the U.S. economy was still in good shape but “cross-currents” have increased.

The Fed also said it would adjust its balance sheet runoff if economic conditions warranted it, though interest-rate moves would continue to be its main monetary tool. It said the same thing in almost the same words in April 2018, a few months after the balance sheet began steadily shrinking in October 2017. It now stands at just above $4 trillion.

Some hawkish critics accuse Powell of caving in, either to Trump’s barbs or to short-term market pressures. He refutes such claims, and the data is arguably on his side. But he could be more consistent in his language. Last month, for example, he said the Fed’s balance sheet would end up “substantially smaller.” Earlier, Powell had mentioned flexibility in the winddown, after saying in December that it was on “autopilot.”

But investors have overreacted too often, acting like the Fed is boxed into a policy direction instead of having the flexibility that it has always had. This time, the central bank decided to hold their hands, and patiently repeat that it will be patient.

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