The Federal Reserve is likely to refrain from raising interest rates for the rest of the year, cementing the US central bank's sharp shift towards a "patient" approach to monetary tightening in the face of waning economic momentum in the US and overseas.
At the end of a two-day meeting in Washington, US monetary policymakers decided unanimously to keep the target range for the Federal Funds rate between 2.25 per cent and 2.5 per cent, where it has been since December, as widely expected by economists.
Whereas late last year the median interest rate forecast of Fed officials implied two additional hikes in 2019, it now implies none, as US central bankers downgraded their expectations for US economic growth this year to 2.1 per cent from 2.3 per cent in December.
The Fed’s move towards no more interest rate hikes this year is likely to be greeted with satisfaction by central bankers worldwide, particularly in emerging markets, where there have been significant worries about the impact of US monetary tightening.
Pat Byrne, head of money markets at Bank of Ireland, said the Fed had delivered more than financial markets had been expecting on a number of fronts.
“The Fed surprised the market again in their March meeting, for the second time in three months, by lowering their growth outlook and their interest rate outlook in tandem with an earlier than expected end to their balance sheet wind-down,” he said.
Mr Byrne said markets were now pricing a modestly lower interest rate path in the years ahead. “Any acceleration of this market path would be unwelcome for the Fed as it would feed the narrative around slower global growth,” he said.
Treasuries rallied strongly after the statement, with the yield on the benchmark 10-year US Treasury dropping eight basis points to just under 2.53 per cent – the biggest fall since May 2018. The yield on the more policy-sensitive two-year Treasury was down 7.7 basis points at 2.39 per cent.
Equities quickly trimmed their declines from earlier in the day, pulling both the S&P 500 and the Nasdaq Composite market into positive territory.
At the start of a press conference following the meeting, Fed chairman Jay Powell said the US economy was in a "good place" and his goal was to "keep it" that way. He said there was "no need to rush for judgment" on interest rates and it could be "some time" before a change would be warranted.
“The data are not sending a signal that we need to move in one direction or another”
The Federal Open Market Committee statement suggested some growing reservations about the outlook compared with its last gathering in January. While the labour market remained "strong", the "growth of economic activity has slowed from its solid rate in the fourth quarter", it said.
At the same time, it said “recent indicators” pointed to “slower growth of household spending and business fixed investment”.
In a separate move, the US central bank announced plans to end the reduction of its balance sheet that had been under way since 2017 to shed some of the assets it built up during multiple rounds of quantitative easing during the financial crisis.
The Fed said it would slow the monthly reduction of its Treasury holdings from $30 billion to $15 billion starting in May, and expected to “conclude” the reduction of aggregate securities at the end of September. However, the Fed would still allow its holdings of mortgage-backed debt to decline, in order to end up with a greater share of Treasuries than it has now.
Most economic data in recent weeks has supported the Fed’s move towards a more dovish approach to interest rates increases. Inflation data has been relatively soft, while the latest readings on job creation and industrial production have been weak.
But Fed officials are not signalling that monetary policy tightening will be halted entirely. The median projection of US monetary policymakers on Wednesday suggested there would be one interest rate increase in 2020. For next year, Fed officials are predicting growth of 1.9 per cent, compared to a December forecast of 2 per cent growth. – Copyright The Financial Times Limited 2019
