Fed Shifts to 'Patient' Policy on Rate Hikes

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USA job growth surged in January, with employers hiring the most workers in 11 months, the Labor Department said, pointing to underlying strength in the economy despite an uncertain outlook that has left the Federal Reserve wary about more interest rate hikes this year.

Other possibilities range from the timeworn -- Powell knows something scary about the world economy, of which investors are blissfully unaware -- to the more timely: He has a penchant for wrong-footing financial markets, in both directions.

As it held interest rates steady, the U.S. central bank also discarded its promises of "further gradual increases" in interest rates, and said it would be "patient" before making any further moves. "The bar for hiking rates even once in 2019 is extremely high".

Financial conditions tightened considerably in late 2018, and some surveys of business and consumer sentiment have moved lower, "giving reason for caution", the chairman said, adding that "the case for raising rates has weakened somewhat".

Not unexpectedly, the US Federal Reserve has bowed to market demands that it pull back from its previously stated policy of raising interest rates this year, following significant falls on Wall Street during December.

Though they missed earlier signs of a pause, markets and economists are now fully on board.

He said the committee is now "evaluating the appropriate timing" for the end of balance sheet runoff and will be finalizing these plans at coming meetings, noting that it will try to avoid "unnecessary market disruption". Societe Generale SA's Omair Sharif described this week's statement as "a letter of apology" to the markets.

"The Fed's view on the economy hasn't actually changed much, arguing that "the labor market has continued to strengthen and that economic activity has been rising at a solid rate".

Stocks rallied following the announcement, with the major USA indexes ending between 1% and 2% higher.

Powell addressed this issue in his press conference.

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This is perhaps the most intriguing conjecture.

On the other hand, if the US labor market stays tight and Wall Street continues its rebound from a rout in December and early January, Fed officials may return to a tightening stance, analysts said. That would be a big departure from previous Fed chairs, including Powell's predecessor Janet Yellen.

At the same time, Powell said, financial conditions tightened somewhat in late 2018-a reference to the stock market turbulence-and remained "less supportive of growth than they were earlier in 2018". The Fed's preferred inflation gauge has risen 1.8 percent in the past 12 months, below its 2 percent annual target. It's hard to tease out such an historic change from what Powell said on Wednesday.

The FTSEurofirst 300 index of leading European shares closed up 0.23 percent, with oil heavyweights Royal Dutch Shell, BP and Total among top gainers.

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.

That's just as well, according to PGIM Fixed Income Chief Economist Nathan Sheets.

The stance was "a surprisingly dovish policy U-turn by the United States central bank", Mike van Dulken and Artjom Hatsaturjants at Accendo Markets said in a note to clients.

This is the sobriquet Bank of England Governor Mark Carney earned in 2014 for giving what were seen as conflicting signals on monetary policy.

The Fed's turnaround was "perplexing", said Roberto Perli, an economist at Cornerstone Macro in one of the more understated reactions.

In a separate statement, the Fed said it had chose to continue managing policy with a system of "ample" reserves, reinforcing the notion that the rundown may end sooner than expected. "We worry that the Fed has traded near-term support for financial markets and the economy for another round of volatility later this year if it is forced to lift rates".