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Fed Signals End of Interest Rate Increases Fed Signals End of Interest Rate Increases
(35 minutes later)
WASHINGTON — The Federal Reserve signaled Wednesday that it may be done raising interest rates.WASHINGTON — The Federal Reserve signaled Wednesday that it may be done raising interest rates.
In a statement following a two-day meeting of its policymaking committee, the Fed said that economic growth remained “solid,” and that it expected growth to continue.In a statement following a two-day meeting of its policymaking committee, the Fed said that economic growth remained “solid,” and that it expected growth to continue.
But in a sharp reversal of its stance just one month ago, the Fed did not say it expected to keep raising interest rates. Instead, the statement said the Fed would be “patient” in evaluating the health of the economy. And it indicated that the Fed stood ready either to increase or to reduce rates, depending on economic conditions.But in a sharp reversal of its stance just one month ago, the Fed did not say it expected to keep raising interest rates. Instead, the statement said the Fed would be “patient” in evaluating the health of the economy. And it indicated that the Fed stood ready either to increase or to reduce rates, depending on economic conditions.
Reinforcing this cautious tone, the Fed also announced that it stood ready to slow or even reverse the steady slimming of its bond portfolio. This, too, marked a striking shift. The Fed in December said it was committed to reducing its holdings of Treasurys and mortgage bonds, which it amassed during the financial crisis to help bolster the economy, at a steady pace. “The case for raising rates has decreased somewhat,” Jerome H. Powell, the Fed’s chairman, said at a news conference following the release of the policy statements. He said that while “we continue to expect that the American economy will grow at a solid pace,” some signs of weakness in consumer and business sentiment, as well as a global economic slowing in places like China, “giving reason for caution.”
“My colleagues and I have one overarching goal: To sustain the economic expansion,” he said.
Reinforcing this more cautious tone, the Fed also announced that it stood ready to slow or even reverse the steady slimming of its bond portfolio. This, too, marked a striking shift. The Fed in December said it was committed to reducing its holdings of Treasurys and mortgage bonds, which it amassed during the financial crisis to help bolster the economy, at a steady pace.
The Fed’s policymaking committee voted unanimously for the changes.The Fed’s policymaking committee voted unanimously for the changes.
Stock markets, which were up even before the Fed decision hit at 2 p.m., climbed more after the arrival of the statement. At around 2:15 p.m., the S&P 500 was up more than 1.4 percent. Yields on shorter-term Treasury securities declined, as traders bet that future rate hikes would be pushed further out.Stock markets, which were up even before the Fed decision hit at 2 p.m., climbed more after the arrival of the statement. At around 2:15 p.m., the S&P 500 was up more than 1.4 percent. Yields on shorter-term Treasury securities declined, as traders bet that future rate hikes would be pushed further out.
The Fed’s newfound caution is likely to delight President Trump, who argued loudly and publicly through much of 2018 that the Fed should stop raising its benchmark rate, which now sits in a range between 2.25 and 2.5 percent. Many liberal economists also argued for the Fed to take a break.The Fed’s newfound caution is likely to delight President Trump, who argued loudly and publicly through much of 2018 that the Fed should stop raising its benchmark rate, which now sits in a range between 2.25 and 2.5 percent. Many liberal economists also argued for the Fed to take a break.
The unemployment rate remains low by historical standards, but inflation has been sluggish for the entirety of the last decade — and the Fed’s statement noted market-based measures of inflation expectations have weakened in recent months.The unemployment rate remains low by historical standards, but inflation has been sluggish for the entirety of the last decade — and the Fed’s statement noted market-based measures of inflation expectations have weakened in recent months.
The statement also referred to the weakness of global growth and volatility in a range of financial markets.The statement also referred to the weakness of global growth and volatility in a range of financial markets.
“In light of global economic and financial developments and muted inflation pressures, the committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,” the statement said.“In light of global economic and financial developments and muted inflation pressures, the committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,” the statement said.
The Fed issued a second statement about its balance sheet. Mr. Powell did not indicate how long the Fed’s “patient period” might persist and when the Fed might consider another rate adjustment. But he said that there would have to be strong signs of inflation to warrant an increase.
“The length of this patient period is going to depend entirely on incoming data and its implications for the outlook,” he said.
When asked what had changed from December, when the Fed indicated rate increases were likely to continue into 2019, Mr. Powell said that “the narrative of slowing global growth continues.”
Mr. Powell also pointed to the five-week government shutdown, which is expected to take an economic toll on first quarter economic growth. The Congressional Budget Office has projected the shutdown will extract $11 billion from the economy, with about $3 billion permanently lost. Mr. Powell said he agreed that the shutdown “will leave some sort of imprint on first quarter GDP” and said that another funding impasse could continue to sap economic confidence.
The Fed also signaled a change in the size of its portfolio, saying it could ultimately retain a larger holding of bonds than it had previously conveyed to the markets.
The Fed amassed more than $4 trillion in Treasury securities and mortgage bonds in the wake of the financial crisis, as part of its broader campaign to revive economic activity by reducing borrowing costs. Since the fall of 2017, the Fed has gradually reduced those holdings, currently at a pace of about $45 billion per month.The Fed amassed more than $4 trillion in Treasury securities and mortgage bonds in the wake of the financial crisis, as part of its broader campaign to revive economic activity by reducing borrowing costs. Since the fall of 2017, the Fed has gradually reduced those holdings, currently at a pace of about $45 billion per month.
Markets have blamed the recent volatility on the Fed’s balance sheet runoff, saying it was causing investors to dump riskier assets like stocks and corporate bonds and snap up safer Treasurys and mortgage securities. The Fed’s bond-buying program, known as quantitative easing, tried to goose the economy by holding down long-term interest rates and encouraging investors to buy riskier investments.Markets have blamed the recent volatility on the Fed’s balance sheet runoff, saying it was causing investors to dump riskier assets like stocks and corporate bonds and snap up safer Treasurys and mortgage securities. The Fed’s bond-buying program, known as quantitative easing, tried to goose the economy by holding down long-term interest rates and encouraging investors to buy riskier investments.
On Wednesday, the Fed indicated it could change the pace and path of its portfolio reduction and keep more money in the bond market if necessary. On Wednesday, the Fed released a second statement indicating it could change the pace and path of its portfolio reduction and keep more money in the bond market if necessary.
“The committee is prepared to adjust any of the details for completing the balance sheet normalization in light of economic and financial developments,” the statement said. It added the Fed also stood willing to increase the size of the balance sheet, if necessary.“The committee is prepared to adjust any of the details for completing the balance sheet normalization in light of economic and financial developments,” the statement said. It added the Fed also stood willing to increase the size of the balance sheet, if necessary.
The decision has limited implications for the general public. Some Fed officials and outside experts think that the new approach has improved the Fed’s ability to influence economic conditions, but the practical difference is generally regarded as modest.The decision has limited implications for the general public. Some Fed officials and outside experts think that the new approach has improved the Fed’s ability to influence economic conditions, but the practical difference is generally regarded as modest.
Before the financial crisis, the Fed influenced economic conditions by adjusting the quantity of reserves in the banking system. Banks are required to hold reserves in proportion to deposits, so constraining the supply forced banks to compete for the available reserves by paying higher interest rates. That, in turn, caused banks to raise interest rates on loans.
During the crisis, the Fed pumped enough reserves into the banking system to cut short-term interest rates nearly to zero. Then it continued to pump reserves into the system, purchasing Treasuries and mortgage bonds to bring down long-term rates.
The result is a system still awash in reserves.
Since 2015, the Fed has gradually raised short-term rates by simulating a scarcity of reserves: It pays banks to leave the extra money untouched.
“The ultimate size of our balance sheet will be driven primarily by financial institution demand for reserves,” Mr. Powell said on Wednesday, adding that “estimates of the level of reserve demand is quite uncertain.”