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Fed leaves rates unchanged, notes slowing in business investment

CNBC International 2018-11-09 00:30:04
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Fed leaves rates unchanged    24 Mins Ago | 01:28

In its first meeting since October's market turmoil and this week's midterm elections, the Federal Reserve voted to maintain the current level of its benchmark interest rate.

The policymaking Federal Open Market Committee, as expected, unanimously approved keeping the federal funds rate in a range of 2 percent to 2.25 percent. Markets figured the central bank would hold the line at this meeting and probably approve a quarter-point hike in December, which would be the fourth of the year.

There were a few tweaks to the way policymakers are viewing economic conditions.

On the upside, the committee noted that the unemployment rate "has declined" since the September meeting. The Labor Department last week reported that the headline jobless level was at 3.7 percent, the lowest since December 1969.

However, the statement noted that the "growth of business fixed investment has moderated from its rapid pace earlier in the year."

There was no detail or data given for why officials see investment declining, though companies reported during third-quarter earnings season that some of their investment plans have been curtailed due to the ongoing trade war between the U.S. and China.

The economy otherwise has been humming along strongly, and the FOMC reiterated its belief that "economic activity has been rising at a strong rate." GDP growth this year has averaged 3.3 percent for the first three quarters and is expected to come in around 3 percent for the final three-month period of 2018.

No nod to market volatility

There was no mention of the volatility that has gripped financial markets since mid-October, when Fed Chairman Jerome Powell made remarks that Wall Street took as hawkish for the pace of future rate hikes.

"Interest rates are still accommodative, but we're gradually moving to a place where they will be neutral," Powell said during an interview with PBS. "We may go past neutral, but we're a long way from neutral at this point, probably."

The FOMC at its September meeting actually voted to remove the word "accommodative" from its description of the current policy path. Powell and others have said the word is no longer useful in describing how the Fed is proceeding.

Since December 2015, the central bank has approved eight quarter-point rate hikes, bringing the benchmark rate to around a 10-year high.

Powell's statements were followed by a prolonged stock market sell-off and a rise in short-term rates. The two-year Treasury note eclipsed a decade high Wednesday and the benchmark 10-year note is around 3.22 percent, near its high point since 2011.

With November's expected pause in rate hikes behind, the market now will turn its sights towards December. Traders on the fed funds futures market are implying about a 93 percent probability for a hike at the year's final meeting.

The market and the Fed differ on the path in 2019.

Fed officials at the September meeting pointed to three increases next year, but the market currently is pricing in only two. The September projections indicated at least one more hike in 2020, which the market also does not see.

Along with the move Thursday to keep the benchmark rate anchored at its current level, the committee voted to maintain the rate the Fed pays on excess bank reserves at 2.2 percent.

Market participants have been watching the IOER, as it is used as a guide for the funds rate. The two rates are now exactly equal, and if there is an appearance that reserves are getting scarce in the banking system and driving up rates, that could cause the Fed to halt the run-off of its balance sheet.

The central bank is allowing a capped level of $50 billion in proceeds to run off each month from the portfolio of bonds it purchased during its efforts to stimulate the economy. Some market participants expect the Fed will approve a 20 basis point increase for the IOER in December as a way to keep the funds rate from getting too close to the top end of its range. The current 2.2 percent funds rate is just 5 basis points away from the upper bound of the range.