Fed: Surprise on the dovish side - Westpac

"The case for raising rates has decreased somewhat", Fed chairman Jerome Powell said at a news conference following the rate announcement.

As the central bank does every January now, the Fed also published a separate statement on its longer-run goals and policy strategy.

Continued U.S. economic growth was still "the likeliest outcome", Powell said, but was now less certain than a month ago when the Fed said the economy was just as likely to grow faster than expected as it was to face a sharp downturn.

Late in December the Dow had sunk to its lowest level since September 2017, dogged by factors including worries over cooling economic growth and trade tensions, adding pressure on the Fed to reassess its tightening bias.

The federal funds rate is also tied to most revolving lines of credit, including home equity lines and auto loans.

Financial markets dove afterward, upset that in his news conference, Chairman Powell had sketched a rosy view of the economy and appeared to suggest that the Fed would likely resume raising rates in the coming months. But Fed governors went so far as to suggest they may pause further rate hikes.

This led to the removal of the phrase in previous statements that the Fed judged further rises to be "appropriate" and its replacement by the message that the Fed would be "patient" as it determined future adjustments.

"The situation now calls for patience", he said, referring to the prospect of further rate hikes.

As of now, only two rate hikes are priced in for 2019, one in June and the other in December. The statement reaffirmed the central bank's 2 percent inflation target, and again stressed its symmetry, meaning it would be concerned if it persistently ran above or below that target.

The economy is expected to slow this year, given the belief by economists that the boost from President Trump's tax cuts and billions in extra government spending would start to fade this year.

The European slowdown has raised concerns at the European Central Bank.

"Over the past few months we have seen some cross-currents and conflicting signals", he said, citing slowing growth in China and Europe, ongoing trade negotiations, the partial government shutdown in the USA, and the tightening of financial conditions in late 2018.

This year, President Trump will have the opportunity to fill 2 vacancies on the Fed's 7-member board. However, a big dovish shift in the Fed's stance should support the yellow metal for some time (and unless investors, now with Powell's put at hand, shift into riskier assets). The job market, for example, remains robust, with solid and steady hiring.

"The process of balance sheet normalization is unprecedented", Powell said, and throughout the process "we've been willing to make changes as we learn more about the process".

"Back in November, December, I think the markets thought the Fed was against them". It has trimmed its balance sheet from 4.5 trillion dollars at its peak time to the current 4.1 trillion dollars.

"I think that was something that me and many others were anxious about as there was talk of an even longer shutdown", said Powell, who endorsed Congress pursuing policies that would avert another episode in the future.

In afternoon trading, the dollar fell 0.2 percent against the yen to 108.81 after earlier falling to a two-week low of 108.51. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.

MSCI's index of stocks worldwide rose 0.92 percent and its emerging market index gained 1.28 percent.

  • David Armstrong