[Good Morning Stock Market] US Fed Maintains 'Interest Rate Freeze'... Stock Market Gives Back Gains

Jerome Powell, Chairman of the U.S. Federal Reserve (Photo by AP Yonhap News)

[Asia Economy Reporter Kum Boryeong] On the 29th (local time), the US Federal Open Market Committee (FOMC) meeting in January kept the federal funds target rate unchanged at 1.50~1.75% per annum. The statement showed almost no change in the economic assessment. Similar to December last year, it indicated moderate economic expansion and low unemployment. However, the evaluation of household consumption shifted to a somewhat more cautious tone than before.

◆ Ha Geon-hyeong, Researcher at Shinhan Financial Investment = The direction of the US Federal Reserve's (Fed) monetary policy met market expectations. The unanimous decision to keep the base rate unchanged and the emphasis on achieving a symmetric inflation target suggested a policy of maintaining the current interest rate level for a considerable period. The federal funds futures market expects one to two rate cuts this year. However, if downside risks to the economy, such as new coronavirus variants, do not materialize, there is likely to be little change in the Fed's monetary policy.

As short-term financial markets regain stability, optimism about the economic outlook has emerged due to the G2 Phase One trade agreement, and the Fed is exploring exit strategies for liquidity supply. The Fed slightly raised the interest on excess reserves, which had been near the lower bound of the base rate, to adjust liquidity supply in the market. If the economic recovery becomes visible, the balance sheet expansion policy is likely to end within the first half of the year.

Despite the Fed's plan to maintain the current interest rate level for a considerable period, the mention of the timing for ending liquidity supply policies led financial markets to evaluate the FOMC meeting neutrally. Stock prices rose immediately after the FOMC statement release but gave back gains following Powell's press conference mentioning the timing of ending liquidity supply policies. The value of the dollar also showed a pattern of weakening first and strengthening later.

◆ Lee Sang-jae, Researcher at Eugene Investment & Securities = Will the Fed's pro-growth financial policy continue to drive the New York stock market's upward momentum in 2020? This depends on whether the economic stimulus effect of rate cuts and the stock market support from asset purchases will persist. Regarding the economic stimulus effect of interest rate policy, we maintain the view that it is favorable for the US economic recovery in 2020 but lacks 2% to act as a catalyst. If the federal funds rate is not further cut in 2020, the spread between the federal funds rate and the neutral rate will be only 25 basis points, significantly smaller than the approximately 200 basis points during previous monetary easing periods. The lagged correlation between the US interest rate spread and the ISM manufacturing and non-manufacturing indices also suggests a low likelihood of an early meaningful recovery.

The strong performance of the New York stock market since the fourth quarter of 2019 is largely attributed to liquidity supply through the Fed's Repo asset expansion. Therefore, if the Fed's Repo operation program continues at least until the end of April, as Chairman Powell indicated, the bullish trend in the New York stock market remains valid. However, if expectations for continuation into the second half weaken, the pressure to support the stock market will diminish. The importance of the March FOMC meeting, where specific plans are expected to be announced, has increased.

This content was produced with the assistance of AI translation services.