US economy

Fed sees no further rate rises in 2019


The Federal Reserve has signalled it will refrain from raising interest rates for the rest of the year in the face of waning economic momentum in the US and overseas, cementing a sharp, dovish shift in monetary policy led by chairman Jay Powell.

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 rises 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 outcome of the meeting suggested Fed officials have grown increasingly sceptical of the economy’s ability to sustain the 3 per cent growth rate achieved last year while it benefited from the Trump administration’s tax cut-driven fiscal stimulus. The decision to hold rates steady for the foreseeable future also exposed their lingering — and possibly rising — concerns about risks associated with the UK’s withdrawal from the EU and the US-China trade dispute.

Michelle Meyer, head of US economics at Bank of America Merrill Lynch, said the result was that the Fed had set a new, higher “bar” for interest rate increases. “They need to be really convinced that the recovery is ongoing and that inflation is going to move up,” she said. “They really have pivoted from what they had been saying in the fall in a pretty dramatic way,” she added. 

Treasuries rallied strongly after the statement, with the yield on the benchmark 10-year US Treasury dropping 8 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 7.7bp at 2.39 per cent. Bond yields move inversely to prices

Equities quickly trimmed their big declines from earlier in the day, although both the S&P 500 and the Dow ended slightly down on the day. 

Meanwhile, the US dollar fell, which is likely to be met with relief among US exporters and some central bankers around the world, particularly in emerging markets, where there have been significant worries about the impact of US monetary tightening on their currencies. 

“Part of the reason the dollar was supported last year was because the US was raising rates while the rest of the globe wasn’t normalising,” said Mona Mahajan, US investment strategist at Allianz. “Beyond just stabilising we could see some weakness in the dollar, and I think that’s going to play out and have ripple effects in global markets,” she added. 

Opening a press conference following the meeting, Mr 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 $30bn to $15bn 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.

Mr Powell said the size of the balance sheet was expected to be about 17 per cent of gross domestic product, or a little more than $3.5tn, once the run-off was complete. “They didn’t want to have to think about switching abruptly from shrinking the balance sheet to all of a sudden expanding it if the economy were to weaken,” Ms Meyer said. “They want to move to hold, put it in their back pocket and not bring it out again until they need it to support the economy.”

Most economic data in recent weeks has supported the Fed’s move towards a more dovish approach to interest rates increases. Inflation data have been relatively soft, while the latest readings on job creation and industrial production have been weak. 

Some of the biggest external risks to the US economy and financial sector, such as the fate of Brexit and the US-China trade talks, are still present and laden with uncertainty. 

On Brexit specifically, Mr Powell said the Fed was watching carefully and “supervising financial institutions” that were active in the US and UK so that they would be ready for a “full range of possible outcomes”.

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 with a December forecast of 2 per cent growth. But markets were increasingly predicting that the US central bank might be forced to cut rates. The probability that the Fed would cut interest rates this year has risen from 25 per cent on Tuesday to 39.5 per cent on Wednesday. 

The Fed’s shift towards a more cautious approach on interest rates has met with favour in US financial markets, supporting Mr Powell’s approach. Equity indices have rallied this year, after suffering significant losses in the fourth quarter of 2018. US President Donald Trump had regularly and openly criticised the Fed while it was on course for a more aggressive path of monetary tightening, but has recently spoken less about the US central bank.

Additional reporting by Peter Wells in New York



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