Federal Reserve leave rates unchanged, projects no hikes in 2019.

‘Economic activity has slowed’

WASHINGTON • The U.S. Federal Reserve held interest rates steady on Wednesday and its policy-makers abandoned projections for further rate hikes this year as the U.S. central bank flagged an expected slowdown in the economy.

In a major shift in its perspective, the Fed also now expects to raise borrowing costs only once more through 2021, and no longer anticipates the need to guard against inflation with restrictive monetary policy.

After a two-day policy meeting that sealed the switch to a less-aggressive posture, the Fed also said it would slow the monthly reduction of its holdings of Treasury bonds from up to US$30 billion to up to US$15 billion beginning in May.

It said it would end its balance sheet runoff in September provided the economy and money market conditions evolved as expected. Redemptions of mortgage-backed securities would at that point be reinvested in Treasuries up to as much as US$20 billion per month, moving the Fed generally toward a Treasuries-only approach to its assets.

The combined announcements mean that, after tightening monetary policy with two levers at once over the past year, the Fed is now pausing on both fronts to adjust to weaker global growth and a somewhat weaker outlook for the U.S. economy.

The S&P 500 and the Dow ended lower on Wednesday as interest-rate-sensitive financial stocks dragged down the indexes after the Fed’s announcement.

“The first reaction to a Fed statement is always the wrong reaction,” said Art Hogan, chief market strategist at National Securities in New York. “Hey great, the ambulance got here, oh wait — we need an ambulance. The Fed to the rescue — oh wait, we need the Fed to rescue us?”

Updated quarterly economic projections released by the Fed showed weakening on all fronts compared to the forecasts from December, with unemployment expected to be slightly higher this year, inflation edging down, and economic growth lower as well.

“Growth of economic activity has slowed from its solid rate in the fourth quarter,” the Fed said in a policy statement that kept its benchmark overnight lending rate, or federal funds rate, in a range of 2.25 per cent to 2.50 per cent.

“Recent indicators point to slower growth of household spending and business fixed investment in the first quarter ... overall inflation has declined.”

Nonetheless, the committee said it viewed “sustained” growth as the most likely outcome.

Fed policy-makers project gross domestic product growth to slow to 2.1 per cent this year from the previous forecast of 2.3 per cent, while the unemployment rate is forecast at 3.7 per cent, slightly higher than the December projection.

Inflation for the year is now seen at 1.8 per cent, compared to the Fed’s forecast in December of 1.9 per cent.

The new projections amounted to a wholesale downgrade of the Fed’s outlook, with at least nine of its 17 policy-makers lowering their expected rate path and collectively shaving a full half of a percentage point off the expected fed funds rate at the end of this year.

The move put the Fed in synch with financial markets’ current expectations that the tightening cycle was all but finished. Some investors expect the next move to be a rate cut.

The central bank also fixed a problem hanging over it from December, when Powell roiled markets by saying the reduction of the balance sheet was on “auto pilot.”