The Federal Reserve on Friday issued its semiannual monetary policy report, just ahead of Fed Chairman Jerome Powell’s testimony before the Senate Banking Committee next week. While economic activity during the second half of 2018 increased at a solid pace, weakening global economic and financial conditions toward the end of the year — along with “muted inflation pressures” — signal a need for the Federal Open Market Committee to be “patient” as it considers future rate hikes, the report said.
Specifically, the Fed pointed to a strengthening labor market, a pick-up in wage growth and 2018 GDP growth of just under 3 percent, as well as a relatively stable U.S. financial system. However, a slowdown in consumer spending, business investment and housing market activity seems to reflect a shrinking tolerance for risk, the report noted.
With respect to financial stability, the report indicated that regulatory capital and liquidity ratios are at historically high levels, and that funding risks are low relative to the days leading up to the last crisis. However, business debt continues to rise — particularly among highly leveraged firms — and credit standards have deteriorated over the past year, the Fed said. While the Fed’s assessment is that “core financial intermediaries… appear well positioned to weather economic stress,” it added that global factors — including Brexit and stress in emerging market economies — could pose downside risks in the months ahead.