Alexander Ng

Thu, Jan 31

US Federal Reserve Stance - From Gradual to Patient

On Wednesday 30th January, the Federal Reserve (FED) Open Market Committee returned a unanimous vote to hold US floating interest rates between 2.25 – 2.5% since the last hike in December.  Citing global financial markets slowdown and geopolitical uncertainties, the FED shifted tone on their forward guidance from “further gradual increases” to a much more dovish “patiently waiting for greater clarity” stance.  Powell stated, ‘’Ultimately, I think, we (US) benefit from strong growth abroad”.

With open issues including Brexit and Sino-US trade negotiations still very much active on the table, and in addition to the recently-concluded US Government shutdown, Powell had indicated that the FED would be prepared to make balance sheet adjustments through reduction of central bank’s bond portfolio “if conditions warrant”.  The FED’s balance sheet includes a combination of Treasuries and mortgage-backed securities purchased with aim to lower long-run rates and stimulate the economy during and after the last financial crisis as part of the stimulus programme.

From the released FOMC statement, US labour market has continued to strengthen while job gains remain strong.  US economic activity has been robust, rising at a solid rate while unemployment rate has remained low.  Inflation has also been near the Committee’s symmetric 2% target.  However, global growth outlook just recently downgraded by the International Monetary Fund (IMF) last week, with weaker than expected data from both China and Europe supports the FED’s decision to hold rates and adopt a “patient” stance. 

The shift in rhetoric from last night’s FED statement has shaken the market with US Dollar bearish across major FX pairs and maintaining inverse correlation, US indices including the S&P500, Dow Jones30, and NASDAQ-100 reaching yearly highs since start of 2019.

S&P500 Daily Chart (2019)

USD/JPY Daily Chart (2019)

With Feburary 1st being the first Friday of the month, US will be releasing employment and wage growth figures and in just under 2 weeks’ time, inflation data to follow on the 13th Feb.  Upcoming results could be leading indicators to warrant a “more accommodative” monetary policy from the FED.