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Fed Keeps Rates Unchanged, Signals No More Increases Likely This Year

The Federal Reserve held its benchmark interest rate steady Wednesday, and a majority of officials at the central bank signaled they might not raise the rate at all this year.

The central bank also said that in May it would slow the pace at which it is shrinking its $4 trillion asset portfolio and end the runoff of its Treasury holdings at the end of September, exactly two years after it began the process.

[For up-to-the-minute news and analysis of the Fed please see Federal Reserve Interest-Rate Decision — Live Analysis]

“The U.S. economy is in a good place and we will use our monetary policy tools to keep it there,” Fed Chairman Jerome Powell at a news conference after the central bank’s two-day policy meeting.

But he noted signs since December that economic growth abroad is slowing more than expected, and he said U.S. economic data have been mixed so far this year.

Interest rate increases could be on hold indefinitely, Mr. Powell suggested. “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy,” he said.

Rate projections released after the meeting made more explicit the Fed’s recent policy turnabout. Eleven of the 17 officials who play a role in interest-rate policy didn’t think the Fed would need to raise rates at all this year, up from two in December. The remaining six officials projected between one and two increases would be needed in 2019.

Most of these officials now see the Fed raising rates just one more time in the next three years, down from an estimate of three times last December.

The shift has coincided with inflation falling shy of the officials’ estimates last year that it would rise above the central bank’s 2% target.

Mr. Powell said he was discouraged that the central bank hadn’t seen inflation rise in a more sustainable fashion. “I don’t feel we have convincingly achieved our 2% mandate in a symmetrical way,” he said. “It’s one of the major challenges of our time, to have downward pressure on inflation” globally, he added.

Fed officials believe 2% inflation is consistent with a healthy economy. They see inflation much lower than that as a sign of weak economic demand, and worry that falling inflation can give way to falling prices — or deflation — an economically harmful condition that can be hard to reverse.

When asked, Mr. Powell wouldn’t specify what circumstances would trigger an interest-rate cut, saying Fed officials don’t see data suggesting they should move rates up or down. But, he said, ” When the time comes, we’ll act appropriately.”

In its postmeeting policy statement, the central bank repeated its prior stance that it “will be patient” in determining future changes in rates. It noted that many investors indicate they continue to expect low price pressures and that lower energy prices had pulled down overall inflation.

The central bank raised its benchmark rate four times last year, most recently in December, to a range between 2.25% and 2.5%. At that meeting, most Fed officials penciled in between one and three rate increases for 2019.

After a period of exceptional market volatility late last year — brought on by concerns over slowing global growth, trade tensions and the Fed’s policy stance — central bank leaders signaled an about-face early this year.

Mr. Powell cited mild inflation pressures, a sharp pullback in financial risk-taking, and clear threats to U.S. growth in explaining the Fed’s new wait-and-see stance after the Fed’s meeting in late January.

On Wednesday, a few more Fed officials estimated that the “neutral rate” — the rate intended to neither stimulate nor slow down the economy — had declined compared with their earlier estimates.

While the range of estimates for this rate held steady at between 2.5% and 3.5%, six officials estimated the neutral rate now sits at the bottom of the range, up from four officials in December.

Since 2015, the Fed raised rates on the theory that declining unemployment would eventually generate stronger price pressures. This framework dictated that, even with inflation running below the Fed’s 2% target, the probability of higher future inflation demanded pre-emptive action by the central bank.

Wednesday’s projections showed that officials continue to revise lower their thinking about the point at which the unemployment rate is consistent with stable prices. The range of those estimates ran from 4% to 4.6%, with the median falling to 4.3%. That is down from a median estimate of 4.5% one year ago and 4.8% in 2016.

These revisions are important because they suggest the economy can employ more people without risking an acceleration in inflation.

Officials revised lower their projection for growth in economic output this year, and they revised higher their projection for the unemployment rate. The latest projections show officials believe inflation will hold at their 2% target over the next three years with roughly one more interest rate increase after this year.

One year ago, most officials projected the Fed would need to raise interest rates this year to slow economic growth closer to its long-run trend and avoid potential overheating. That is no longer the case.

On the asset-portfolio front, the Fed has been shrinking its $4 trillion in holdings since October 2017. While the runoff has slowly removed stimulus from the economy, officials have said the decision to end that runoff is being driven primarily by technical factors to make sure the central bank can smoothly implement its monetary policy decisions.

The Fed currently allows $30 billion in Treasurys and $20 billion in mortgage bonds to mature every month, though the actual redemptions have been lower because the Fed’s stock of maturing bonds is smaller in most months.

Beginning in May, the Fed will slow to $15 billion the monthly Treasury redemptions. It will stop the runoff of the Treasury holdings in October. Officials will continue to allow the mortgage holdings to mature, and they will reinvest maturing principal below the $20 billion cap into Treasury securities.

The Fed hasn’t addressed a number of questions around how to manage the portfolio once they stop shrinking it.

At some point in the future, the Fed will need to buy additional Treasurys to keep up with growth in currency. The central bank said Wednesday it hasn’t decided when to start increasing the size of the balance sheet. At issue is gauging demand for deposits held by banks at the Fed, known as reserves.

Once the Fed stops shrinking the balance sheet, reserves will very slowly decline as other liabilities, namely currency, continue to grow. At some point, reserves could grow scarce enough to raise the rate banks charge in overnight money-market accounts, which would raise the Fed’s benchmark rate.

Fed officials said Wednesday they will allow the balance sheet to resume growing before reserves fall to such a level.
Source: Dow Jones

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