Fed says it will be patient and flexible when deciding next moves

Central bankers said on Wednesday that they would be "patient" in future when determining what changes in monetary policy were needed to meet their objectives for growth and inflation, dropping the reference to a "gradual" pace of interest rate hikes.

They pointed to "global economic and financial developments" and "muted" inflation pressures as the justification for their change in bias.

"The Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes," the Federal Open Market Committee said in a statement.

"In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes."

In a separate statement, the FOMC also said signaled flexibility when it came to the size of its balance sheet, including by dialing back on the process of shrinking it if needed.

During his post-meeting press conference, Fed chair, Jerome Powell, went on to indicate that policymakers now expected to stop shrinking the central bank's balance sheet sooner, as estimates of the level of reserves banks needed to hold had risen over the past year.

To take note of, in the run-up to Wednesday's decision some analysts had cautioned that the Federal Reserve was at risk of still sounding too 'hawkish' relative to market expectations.

Indeed, immediately following Wednesday's announcement, some market commentary judged that taken literally the Fed had implicitly even left the door open to interest rate cuts, although analysts at Pantheon Macroeconomics and Capital Economics still saw scope for further policy tightening by the monetary authority.

In an immediate reaction, as of 1914 GMT the S&P 500 was at its session highs, climbing by 1.9% or 39.79 points to 2,679.82.

Meanwhile, the yield on the benchmark two-year US Treasury note was two basis points lower to 2.54%.

Nevertheless, the rate-setting Committee continued to see "sustained" growth, a "strong" jobs market and inflation near the Fed's symmetric 2.0% target as the most likely outcomes, the policy statement continued.

In his press conference, Powell underscored that point as well, emphasising that policymakers' base case scenario had not seen any "major shift", the importance of adhering to a common-sense risk management framework and the fact that the risk of financial imbalances appearing had decreased.

Powell also indicated that the key determinant of the duration of the Fed's new-found patience would be the incoming economic data.

"Talk about a Fed put. Short of announcing that rate cut is in the cards, this is about as dovish a statement as possible," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

"[...] the point here is that policymakers appear to be going all-in on the slowdown story, despite the incredibly tight labor market, accelerating wages and rising business pricing expectations. In our view, this is very risky, and it means that if the economy holds up as well as we expect, policymakers will have to spin on a dime sometime around mid-year in order to avoid making a serious policy error."

-- More to follow --