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By Yasin Ebrahim

Investing.com – The Federal Reserve held rates steady on Wednesday, as the sluggish pace of inflation coupled with a strong labor market did little to shift the central bank’s outlook on the economy.

In a unanimous decision, the Federal Open Market Committee left its unchanged in the range of 1.5% to 1.75%.

The Fed delivered three rate cuts in 2019, the last in October and policymakers have indicated that rates will remain on hold until there is some significant change in the economic outlook.

“The committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the committee’s symmetric 2 percent objective,” the Fed said in its statement.

With the U.S. labor market in good shape, boasting record-low unemployment, the Fed has identified inflation as the main driver of future policy decisions.

U.S. consumer prices ticked higher in December, while monthly underlying inflation slowed, supporting the Fed’s case to keep interest rates on hold at least through this year.

Looking ahead, the U.S. central bank reiterated that its future policy decisions will be led by incoming data.

“The committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate,” the Fed said.

With rates set to remain on hold, investor focus has shifted to the Fed’s efforts to maintain stability in the overnight lending markets.

In a bid to avoid fears of a liquidity crunch in short-term funding markets that led to a spike in overnight rates in September, the U.S. central bank has been buying Treasury bills of up to $60 billion a month since mid-October. The Fed confirmed that it would purchase Treasury bills at least into the second quarter of 2020.

Against the backdrop of a rally in markets following the Fed’s repo operations, market participants have been eager for clues on whether or when the central bank expects to withdraw repo funding.

Fed Chairman Jerome Powell in the press conference that followed the statement said the central bank expects that the pace of bill purchases will continue until reserves reach an ample level, expected sometime in the second quarter. The pace of purchases will be gradually scaled down after enough reserves have been built up in the system.

The Fed also raised the effective fed funds rate – the interest it pays on excess reserves – by five basis points to 1.6% from 1.55% to ensure that it remains well within its targeted range of 1.5% to 1.75%.

“Setting the interest rate paid on required and excess reserve balances 10 basis points above the bottom of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the FOMC’s target range,” the Fed added.

The Fed has stressed that its repo funding is not a form of quantitative easing, but many disagree, pointing to the expansion in the central bank’s balance sheet to $4.1 trillion from $3.8 trillion since the launch of the operation.

Fed Keeps Rates Steady as Sluggish Inflation Continues

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