Finance

Fed rate decision May 2024: Fed holds rate steady

Published

10 months ago

May 3, 2024

Fed leaves rates unchanged and moves to ease the pace of balance sheet reduction

WASHINGTON – The Federal Reserve on Wednesday held its ground on interest rates, again deciding not to cut as it continues a battle with inflation that has grown more difficult lately.

In a widely expected move, the U.S. central bank kept its benchmark short-term borrowing rate in a targeted range between 5.25%-5.50%. The federal funds rate has been at that level since July 2023, when the Fed last hiked and took the range to its highest level in more than two decades.

The rate-setting Federal Open Market Committee did vote to ease the pace at which it is reducing bond holdings on the central bank’s mammoth balance sheet, in what could be viewed as an incremental loosening of monetary policy.

With its decision to hold the line on rates, the committee in its post-meeting statement noted a “lack of further progress” in getting inflation back down to its 2% target.

“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the statement said, reiterating language it had used after the January and March meetings.

The statement also altered its characterization of its progress toward its dual mandate of stable prices and full employment. The new language hedges a bit, saying the risks of achieving both “have moved toward better balance over the past year.” Previous statements said the risks “are moving into better balance.”

Beyond that, the statement was little changed, with economic growth characterized as moving at “a solid pace,” amid “strong” job gains and “low” unemployment.

Chair Jerome Powell during the news conference following the decision expanded on the idea that prices are still rising too quickly.

“Inflation is still too high,” he said. “Further progress in bringing it down is not assured and the path forward is uncertain.”

However, investors were pleased by Powell’s comment that Fed’s next move was “unlikely” to be a rate hike. The Dow Jones Industrial Average jumped after the remarks, and rose as much as 500 points. He also stressed the need for the committee to make its decisions “meeting by meeting.”

On the balance sheet, the committee said that beginning in June it will slow the pace at which it is allowing maturing bond proceeds to roll off without reinvesting them.

‘Quantitative tightening’

In a program begun in June 2022 and nicknamed “quantitative tightening,” the Fed had been allowing up to $95 billion a month in proceeds from maturing Treasurys and mortgage-backed securities to roll off each month. The process has resulted in the central bank balance sheet to come down to about $7.4 trillion, or $1.5 trillion less than its peak around mid-2022.

Under the new plan, the Fed will reduce the monthly cap on Treasurys to $25 billion from $60 billion. That would put the annual reduction in holdings at $300 billion, compared with $720 billion from when the program began in June 2022. The potential mortgage roll-off would be unchanged at $25 billion a month, a level that has only been hit on rare occasions.

QT was one way the Fed used to tighten conditions after inflation surged, as it backed away from its role of assuring the flow of liquidity through the financial system by buying and holding large amounts of Treasury and agency debt. The reduction of the balance sheet roll-off, then, can be seen as a slight easing measure.

The funds rate sets what banks charge each other for overnight lending but feeds into many other consumer debt products. The Fed uses interest rates to control the flow of money, with the intent that higher rates will dampen demand and thus help reduce prices.

However, consumers have continued to spend, running up credit indebtedness and decreasing savings levels as stubbornly high prices eat away at household finances. Powell has repeatedly cited the pernicious effects of inflation, particularly for those at the lower-income levels.

Prices off peak levels

Though price increases are well off their peak in mid-2022, most data so far in 2024 has shown that inflation is holding well above the Fed’s 2% annual target. The central bank’s main gauge shows inflation running at a 2.7% annual rate – 2.8% when excluding food and energy in the critical core measure that the Fed especially focuses on as a signal for longer-term trends.

At the same time, gross domestic product grew at a less-than-expected 1.6% annualized pace in the first quarter, raising concerns over the potential for stagflation with high inflation and slow growth.

Most recently, the Labor Department’s employment cost index this week posted its biggest quarterly increase in a year, sending another jolt to financial markets.

Consequently, traders have had to reprice their expectations for rates in a dramatic fashion. Where the year started with markets pricing in at least six interest rate cuts that were supposed to have started in March, the outlook now is for just one, and likely not coming until near the end of the year.

Fed officials have shown near unanimity in their calls for patience on easing monetary policy as they look for confirmation that inflation is heading comfortably back to target. One or two officials even have mentioned the possibility of a rate increase should the data not cooperate. Atlanta Fed President Raphael Bostic was the first to specifically say he only expects one rate cut this year, likely in the fourth quarter.

In March, FOMC members penciled in three rate cuts this year, assuming quarter percentage point intervals, and won’t get a chance to update that call until the June 11-12 meeting.

Correction: The Federal Reserve kept its benchmark short-term borrowing rate in a targeted range between 5.25%-5.50%. An earlier version misstated the range. The Fed’s next meeting is June 11-12. An earlier version misstated the date.

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Finance

China strives to attract foreign investment amid geopolitical tensions

Published

53 minutes ago

February 23, 2025

Business Finance News

Tensions between the world’s two largest economies have escalated over the last several years.

Florence Lo | Reuters

BEIJING — China is trying yet again to boost foreign investment, amid geopolitical tensions and businesses’ calls for more concrete actions.

On Feb. 19, authorities published a “2025 action plan for stabilizing foreign investment” to make it easier for foreign capital to invest in domestic telecommunication and biotechnology industries, according to a CNBC translation of the Chinese.

The document called for clearer standards in government procurement — a major issue for foreign businesses in China — and for the development of a plan to gradually allow foreign investment in the education and culture sectors.

“We are looking forward to see this implemented in a manner that delivers tangible benefits for our members,” Jens Eskelund, president of the European Union Chamber of Commerce in China, said in a statement Thursday.

The chamber pointed out that China has already mentioned plans to open up telecommunications, health care, education and culture to foreign investment. Greater clarity on public procurement requirements is a “notable positive,” the chamber said, noting that “if fully implemented,” it could benefit foreign companies that have invested heavily to localize their production in China.

There will be a 'stronger push' for foreign direct investments by the Chinese government: Strategist

China’s latest action plan was released around the same time the Commerce Ministry disclosed that foreign direct investment in January fell by 13.4% to 97.59 billion yuan ($13.46 billion). That was after FDI plunged by 27.1% in 2024 and dropped by 8% in 2023, after at least eight straight years of annual growth, according to official data available through Wind Information.

All regions should “ensure that all the measures are implemented in 2025, and effectively boost foreign investment confidence,” the plan said. The Ministry of Commerce and National Development and Reform Commission — the economic planning agency — jointly released the action plan through the government’s executive body, the State Council.

Officials from the Commerce Ministry emphasized in a press conference Thursday that the action plan would be implemented by the end of 2025, and that details on subsequent supportive measures would come soon.

“We appreciate the Chinese government’s recognition of the vital role foreign companies play in the economy,” Michael Hart, president of the American Chamber of Commerce in China, said in a statement. “We look forward to further discussions on the key challenges our members face and the steps needed to ensure a more level playing field for market access.”

AmCham China’s latest survey of members, released last month, found that a record share are considering or have started diversifying manufacturing or sourcing away from China. The prior year’s survey had found members were finding it harder to make money in China than before the Covid-19 pandemic.

Consumer spending in China has remained lackluster since the pandemic, with retail sales only growing by the low single digits in recent months. Tensions with the U.S. have meanwhile escalated as the White House has restricted Chinese access to advanced technology and levied tariffs on Chinese goods.

‘A very strong signal’

While many aspects of the action plan were publicly mentioned last year, some points — such as allowing foreign companies to buy local equity stakes using domestic loans — are relatively new, said Xiaojia Sun, Beijing-based partner at JunHe Law.

She also highlighted the plan’s call to support foreign investors’ ability to participate in mergers and acquisitions in China, and noted it potentially benefits overseas listings. Sun’s practice covers corporates, mergers and acquisitions and capital markets.

The bigger question remains China’s resolve to act on the plan.

“This action plan is a very strong signal,” Sun said in Mandarin, translated by CNBC. She said she expects Beijing to follow through with implementation, and noted that its release was similar to a rare, high-profile meeting earlier in the week of Chinese President Xi Jinping and entrepreneurs.

That gathering on Feb. 17 included Alibaba founder Jack Ma and DeepSeek’s Liang Wenfeng. In recent years, regulatory crackdowns and uncertainty about future growth had dampened business confidence and foreign investor sentiment.

China needs to strike a balance between tariff retaliation and stabilizing FDI, Citi analysts pointed out earlier this month.

“We believe China policymakers are likely cautious about targeting U.S. [multinationals] as a form of retaliation against U.S. tariffs,” the analysts said. “FDI comes into China, bringing technology and know-how, creating jobs, revenue and profit, and contributing to tax revenue.”

In a relatively rare acknowledgement, Chinese Commerce Ministry officials on Thursday noted the impact of geopolitical tensions on foreign investment, including some companies’ decision to diversify away from China. They also pointed out that foreign-invested firms contribute to nearly 7% of employment and around 14% of taxes in the country.

Previously, official commentary from the Commerce Ministry about any drop in FDI tended to focus only on how most foreign businesses remained optimistic about long-term prospects in China.

Finance

The Fed is stuck in neutral as it watches how Trump’s policies play out

Published

14 hours ago

February 23, 2025

Business Finance News

U.S. Federal Reserve Chair Jerome Powell testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on “The Semiannual Monetary Policy Report to the Congress,” at Capitol Hill in Washington, U.S., Feb. 11, 2025.

Craig Hudson | Reuters

The popular narrative among Federal Reserve policymakers these days is that policy is “well-positioned” to adjust to any upside or downside risks ahead. However, it might be more accurate to say that policy is stuck in position.

With an abundance of unknowns swirling through the economy and the halls of Washington, the only gear the central bank really can be in these days is neutral as it begins what could be a long wait for certainty on what’s actually ahead.

“In recent weeks, we’ve heard not only enthusiasm — particularly from banks, about possible shifts in tax and regulatory policies — but also widespread apprehension about future trade and immigration policy,” Atlanta Fed President Raphael Bostic said in a blog post. “These crosscurrents inject still more complexity into policymaking.”

Bostic’s comments came during an active week for what is known on Wall Street as “Fedspeak,” or the chatter that happens between policy meetings from Chair Jerome Powell, central bank governors and regional presidents.

Officials who have spoken frequently described policy as “well-positioned” — the language is now a staple of post-meeting statements. But increasingly, they are expressing caution about the volatility coming from President Donald Trump’s aggressive trade and economic agenda, as well as other factors that could influence policy.

The impact tariffs could have on growth is being underpriced, says PGIM’s Tom Porcelli

“Uncertainty” is an increasingly common theme. In fact, Bostic titled his Thursday blog post “Uncertainty Calls for Caution, Humility in Policymaking.” A day earlier, the rate-setting Federal Open Market Committee released minutes from the Jan. 28-29 meeting, with a dozen references to the uncertain climate in the document.

The minutes specifically cited “elevated uncertainty regarding the scope, timing, and potential economic effects of possible changes to trade, immigration, fiscal, and regulatory policies.”

Uncertainty factors into the Fed’s decision making in two ways: the impact that it has on the employment picture, which has been relatively stable, and inflation, which has been easing but could rise again as consumers and business leaders get spooked about the impact tariffs could have on prices.

Missing the target

The Fed targets inflation at 2%, a goal that has remained elusive for going on four years.

“Right now, I see the risks of inflation staying above target as skewed to the upside,” St. Louis Fed President Alberto Musalem told reporters Thursday. “My baseline scenario is one where inflation continues to converge towards 2%, providing monetary policy remains modestly restrictive, and that will take time. I think there is a potential for inflation to remain high and activity to slow. … That’s an alternative scenario, not a baseline scenario, but I’m attentive to it.”

The operative in Musalem’s comment is that policy holds at “modestly restrictive,” which is where he considers the current level of the fed funds rate between 4.25%-4.5%. Bostic was a little less explicit on feeling the need to keep rates on hold, but emphasized that “this is no time for complacency” and noted that “additional threats to price stability may emerge.”

Chicago Federal Reserve President Austan Goolsbee, thought to be among the least hawkish FOMC members when it comes to inflation, was more measured in his assessment of tariffs and did not offer commentary in separate appearances, including one on CNBC, on where he thinks rates should go.

“If you’re just thinking about tariffs, it depends how many countries are they going to apply to, and how big are they going to be, and the more it looks like a Covid-sized shock, the more nervous you should be,” Goolsbee said.

Many risks ahead

More broadly, though, the January minutes indicated a Fed highly attuned to potential shocks and not interested in testing the waters with any further interest rate moves. The meeting summary pointedly noted that committee members want “further progress on inflation before making additional adjustments to the target range for the federal funds rate.”

There’s also more than just tariffs and inflation to worry about.

The minutes characterized the risks to financial stability as “notable,” specifically in the area of leverage and the level of long-duration debt that banks are holding.

Prominent economist Mark Zandi — not normally an alarmist — said in a panel discussion presented by the Peter G. Peterson Foundation that he worries about dangers to the $46.2 trillion U.S. bond market.

“In my view, the biggest risk is that we see a major sell off in the bond market,” said Zandi, the chief economist at Moody’s Analytics. “The bond market feels incredibly fragile to me. The plumbing is broken. The primary dealers aren’t keeping up with the amount of debt outstanding.”

“There’s just so many things coming together that I think there’s a very significant threat that at some point over the next 12 months, we see a major sell-off in the bond market,” he added.

In this climate, he said, there’s scant chance for the Fed to cut rates — though markets are pricing in the potential for a half percentage point in reductions by the end of the year.

That’s wishful thinking considering tariffs and other intangibles hanging over the Fed’s head, Zandi said.

“I just don’t see the Fed cutting interest rates here until you get a better feel about inflation coming back to target,” he said. “The economy came into 2025 in a pretty good spot. Feels like it’s performing well. Should be able to weather a lot of storms. But it feels like there’s a lot of storms coming.”