Fed opts to leave key rate in place
Decision seen as signal of disquiet
WASHINGTON — The Federal Reserve left its key interest rate unchanged Wednesday and projected no rate increases this year, reflecting a dimmer view of the economy as growth weakens in the United States and abroad.
The Fed said it was keeping its benchmark rate — which can influence everything from mortgages to credit cards to home equity lines of credit — in a range of 2.25 percent to 2.5 percent. It also announced that it will stop shrinking its bond portfolio in September, a step that should help hold down long-term rates. It will begin slowing the runoff from its bond portfolio in May.
Combined, the moves signal no major increases in borrowing rates for consumers and businesses. And together with the Fed’s dimmer forecast for growth this year — 2.1 percent, down from a previous projection of 2.3 percent — the statement it issued after its latest policy meeting suggests it’s grown more concerned about the economy. What’s more, with inflation remaining mild, the Fed feels
no pressure to tighten credit.
“Growth is slowing somewhat more than expected,” Federal Reserve Chairman Jerome Powell said at a news conference. “While the U.S. economy showed little evidence of a slowdown in 2018, the limited data we have so far this year have been somewhat more mixed.”
In signaling no rate increases for 2019, the Fed’s policymakers reduced their forecast from two that were previously predicted in December. They now project one rate increase in 2020 and none in 2021. The Fed raised rates four times last year and a total of nine times since 2015.
The central bank’s theme Wednesday, in its statement and in Powell’s news conference, is that it will remain continually “patient” about pursuing any further rate increases.
The Fed’s decision was approved in an 11-0 vote.
With the prospect of no rate increases ahead anytime soon, stock prices reversed broad losses they had suffered before the Fed issued its statement. The Dow Jones industrial average was down, but other stock indexes rose afterward. Stock prices have been surging since early January, when Powell abruptly reversed course and made clear that the Fed was in no hurry to raise rates and would likely slow the runoff from its balance sheet.
After the Fed issued its forecast of no credit tightening this year, Treasury yields sank sharply, with the 10-year yield touching its lowest level in more than a year. Yields have been falling since November as worries rose about a weaker global picture and a more patient Fed. On Wednesday, the 10-year Treasury yield dropped as low as 2.53 percent, from 2.61 percent late Tuesday and 3.2 percent late last year.
The Fed’s policymakers have clearly settled on the belief that more than a decade after they cut their benchmark rate to a record low near zero — and kept it there for seven years — that rate has now reached what’s called “neutral”: neither stimulating nor restraining economic growth.
The central bank’s pause in credit tightening is a response, in part, to slowdowns in the U.S. and global economies. It says that while the job market remains strong, “growth of economic activity has slowed from its solid rate in the fourth quarter.”
In its statement, the Fed laid out a plan for stemming the reduction of its balance sheet: In May, it will slow its monthly reductions in Treasurys from $30 billion to $15 billion and end the runoff altogether in September. Starting in October, the Fed will shift its runoff of mortgage bonds into Treasurys so its overall balance sheet won’t drop further.
“The Fed is still tightening monetary policy. They are still removing accommodation even after nine rate hikes by a decrease of their asset portfolio,” said Michael Farr, head of investment firm Farr, Miller & Washington. “To be fully neutral, they need to stop that.”
The central bank’s new embrace of patience and flexibility reflects its response since the start of the year to slow growth at home and abroad, a nervous stock market and persistently mild inflation. The Fed executed an abrupt pivot when it met in January by signaling that it no longer expected to raise rates anytime soon.
The shift toward a more hands-off Fed and away from a policy of steadily tightening credit suggests that the policymakers may recognize that they went too far after they met in December. At that meeting, the Fed approved a fourth rate increase for 2018 and projected two additional rate increases in 2019. Powell also said he thought the balance sheet reduction would be on “automatic pilot.”
That message spooked investors, who worried about the prospect of steadily higher borrowing rates for consumers and businesses, and perhaps a further economic slowdown. The stock market had begun falling in early October and then accelerated after the Fed’s December meeting.
President Donald Trump, injecting himself not for the first time into the Fed’s ostensibly independent deliberations, made clear he wasn’t happy, calling the December rate increase wrong-headed. Reports emerged that Trump was even contemplating trying to fire Powell, who had been his handpicked choice to lead the Fed.
But after the December turmoil, the Fed in January began sending a more comforting message. At an economic conference soon after New Year’s Day, Powell stressed that the Fed would be “flexible” and “patient” in raising rates.