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Fed keeps interest rate unchanged, will be 'patient'

The dovish language used by the FOMC reflects the increasing sense that the US economy may have peaked

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Mr Powell late last year repeatedly shook up markets with comments considered to be overly optimistic and hinting at more rate hikes to come.

Washington

THE Federal Reserve left the key US lending rate unchanged on Wednesday, and said it would be "patient" about making any further changes, in the clearest signal yet the central bank has heeded concerns about the economy.

Fed chairman Jerome Powell followed that dovish statement by saying "the case for raising rates has weakened somewhat", given low inflation and amid "cross-currents and risks" buffeting the US economy that will be around for a while.

"In this environment, we believe we can best support the economy by being patient in evaluating the outlook before making any future adjustment to policy," Mr Powell said at a press conference.

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Although the Fed expects that continued expansion of the economy and strong job growth are the "most likely outcomes", the statement signalled the growing uncertainty about the outlook.

"In light of global economic and financial developments and muted inflation pressures, the committee will be patient as it determines the timing and need for any further increases," the policy-setting Federal Open Market Committee (FOMC) said.

In an unusual separate statement, the Fed also said it was prepared to change the pace of reduction of its massive securities holdings, after markets became concerned that the current process was too rigid.

The language used by the FOMC, after the unanimous vote to keep the benchmark interest rate in a range of 2.25 per cent to 2.5 per cent, reflected the increasing sense that the US economy may have peaked.

It cited "solid" economic growth, rather than a "strong rate of growth" highlighted in prior statements.

The decision at the Fed's first policy meeting of the year was expected after central bankers signalled strongly in recent weeks that they intended to tread cautiously about any further moves.

But the unusually dovish language likely will come as a surprise.

The FOMC increased the benchmark rate four times last year but rising concerns about a slowing US economy amid a trade war with China prompted officials to signal they would take time to gauge the economy's performance.

And the five-week government shutdown also dented economic performance in the first quarter of the year, although most of that is expected to be recovered.

However, Mr Powell cautioned that another shutdown or protracted trade negotiations with China could hurt the economy by sapping business confidence.

A second shutdown could have "a permanent effect or lasting effect", he said.

And while the impact of the tariffs Washington and Beijing have imposed on goods so far has not had "material effects on GDP either here or in China, a longer drawn-out set of negotiations back and forth could result in sapping business confidence. Uncertainty is not the friend of business". Mr Powell late last year repeatedly shook up markets with comments considered to be overly optimistic and hinting at more rate hikes to come.

Facing blowback from his efforts to speak plainly, he retreated from his stance and made an effort to stress the uncertainty about the economic outlook and acknowledged that in this case, the Fed took note of the "sustained change in financial conditions". But he declined to put a timeframe on the Fed's patience, saying "the length of this patient period is going to depend entirely on incoming data and its implications for the oulook". One of the concerns was the effect of the Fed's system for gradually reducing its securities holdings, which built up to US$4.5 trillion in the aftermath of the global financial crisis.

It has been reducing those investments by about US$50 billion a month but investors worry that in a slowing economy, that process will tend to raise the cost of borrowing.

The statement on the balance sheet normalisation process said the Fed "would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy". Mr Powell stressed that the goal was to reduce the Fed's holdings without "unnecessary market turmoil". AFP