Federal Reserve foresees no interest rate hikes in 2019

The central bank’s theme Wednesday, in its statement and in a news conference by Chairman Jerome Powell, is that it will remain continually “patient” about pursuing any further rate hikes. In his news conference, Powell used some version of the word “patient” no fewer than 10 times.

Stock market indexes initially rallied on the news, but the gains soon faded and many stocks finished the day down. The Dow Jones Industrial Average lost 141 points, or 0.5 per cent. Analysts said the Fed’s downgraded outlook for the economy might have alarmed investors.

“We think the Fed’s forecasts are still too upbeat,” said Michael Pearce, senior U.S. economist at Capital Economics, saying he thinks sluggish growth will lead the Fed to start cutting rates early next year.

The Fed’s decision Wednesday was approved on an 11-0 vote.

Still, stock prices have been generally 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.

And while stocks struggled Wednesday, the Fed’s plans for no credit tightening this year sent Treasury yields tumbling, with the 10-year yield touching its lowest level in more than a year. The yield reached 2.53 per cent, down from 2.61 per cent late Tuesday and 3.2 per cent 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.”

Some Fed watchers have said they think the next rate move could be a cut later this year if the economy slows as much as some fear it might. But at his news conference, Powell played down that prospect.

“It is a great time for us to be patient and to watch and wait,” Powell said, invoking the theme he has sounded in recent months.

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 had aggressively bought mortgage and Treasury bonds after the 2008 financial crisis to help cut borrowing rates, spur lending and stimulate growth. With the economy now much stronger, the Fed has been gradually shrinking its bond portfolio. But now it’s prepared to slow and then stop that process to avoid putting upward pressure on loan rates.

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 signalling 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 recognize that they went too far after they met in December. At that meeting, the Fed approved a fourth rate hike 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 hike wrong-headed. Reports emerged that Trump was even contemplating trying to fire Powell, who had been his hand-picked 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, Powell stressed that the Fed would be “flexible” and “patient” in raising rates.

Powell, appearing last week on CBS’s “60 Minutes,” denied that pressure from Trump had influenced the Fed’s policy shift. Private economists generally agree that a slowing economy and a sinking stock market, which eased Fed worries about any possible stock bubble, were more decisive factors.

Martin Crutsinger, The Associated Press

by Canadian Press

Federal Reserve foresees no interest rate hikes in 2019

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