The Fed Rules in the Market’s Favor

The Fed Rules in the Market’s Favor

The Fed also shifted to a more dovish stance on its ongoing shedding of assets, saying it was prepared to adjust its plans based on economic and financial developments.

Moreover, the Fed said it could "adjust the details of its balance sheet normalization program", which now is set to let $50 billion of its holdings of Treasury and USA agency mortgage-backed securities mature each month without replacing them.

USA stocks rallied after the announcement, Treasury yields fell and the dollar sank.

By removing references to further rate hikes, the central bank indicated that it's not going to move prematurely on raising interest rates. But it removed language from its December policy statement that risks to the outlook were "roughly balanced".

Powell, who was hand-picked by President Trump for the Fed's top spot, recently attracted scorn from the president for the Fed's rate-hiking path in 2018.

"We have positive earnings, positive economy and a positive Fed", said Andre Bakhos, managing director at New Vines Capital LLC in Bernardsville, New Jersey, adding that trade was the missing piece of the puzzle for investors.

"This marks a full 180 from what the Fed was signaling just a few months ago", said Mohamed El-Erian, chief economic adviser at Allianz, in Newport Beach, California.

Crucially, it also said that the rundown of its balance sheet - or the stockpile of bonds it has accumulated over the past 10 years of quantitative easing - could slow too.

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In another significant move, the committee said will continue to run monetary policy in an ample-reserve regime, where control over short-term interest rates "is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required".

"It's hard to read this as anything other than the Fed has capitulated to the market", said Michael Gapen, chief US economist at Barclays Plc.

Markets and investors will be keen to hear what Federal Reserve Chairman Jerome Powell has to say as a press conference will now follow every monetary policy meeting.

It said USA economic activity was rising at a solid rate, as it maintained the target range for federal funds rate at 2.25-2.5 per cent. Fed policy makers had earlier projected two increases this year.

Officials gathered in Washington with less visibility on the economy after a five-week government shutdown delayed the release of some statistics including December retail sales and fourth-quarter gross domestic product. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier previous year. On Wednesday, the statement said "market-based measures of inflation compensation have moved lower in recent months".

One of the concerns was the effect of the Fed's decision to reduce its securities holdings, which built up to $4.5 trillion in the aftermath of the global financial crisis.

"Inflation is the main story, " said Neil Dutta, head of USA economics at Renaissance Macro Research LLC.

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