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Fed Signals End of Interest Rate Increases Fed Signals End of Interest Rate Increases
(about 4 hours later)
WASHINGTON — The Federal Reserve kept interest rates steady on Wednesday and signaled that it may not raise them again anytime soon, a surprising reversal from last month, when the central bank indicated it expected to continue raising rates in 2019. WASHINGTON — The Federal Reserve signaled on Wednesday that its march toward higher interest rates may be ending sooner than expected, suspending its previous plans to continue raising rates this year.
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. The Fed’s chairman, Jerome H. Powell, said economic growth remained “solid” and the central bank expected growth to continue. But in a sharp reversal of the Fed’s stance just six week ago, Mr. Powell said the Fed had “the luxury of patience” in deciding whether to raise rates again.
But in a sharp deviation from 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. “The case for raising rates has weakened somewhat,” Mr. Powell said, pointing to sluggish inflation, slowing growth in Europe and China, and the possibility of another federal government shutdown.
“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, is “giving reason for caution.” “My colleagues and I have one overarching goal,” Mr. Powell said at a news conference after a two-day meeting of the Fed’s policymaking committee. “To sustain the economic expansion.”
“My colleagues and I have one overarching goal: To sustain the economic expansion,” he said. The Fed left its benchmark interest rate unchanged at its first meeting of 2019, a decision that was widely expected. What surprised markets was the indication that rates, which are in a range of 2.25 percent to 2.5 percent, may stay put for some time.
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 S&P 500 stock index climbed sharply when the Fed issued its statement at 2 p.m., and ended the day up 1.55 percent. Yields on shorter-term Treasury securities, which are heavily influenced by Fed policy, declined as investors concluded that any near-term interest rate increases were off the table.
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 he said would snuff out the economic expansion. While the president did not address the Fed’s decision directly, he wrote on Twitter: “Dow just broke 25,000. Tremendous news!”
Some on the other side of the political spectrum also supported the Fed’s move, saying the slow pace of inflation allowed the Fed to refrain from raising rates, so that job and wage growth could continue.
Jared Bernstein, an economist at the left-leaning Center on Budget and Policy Priorities, summarized the Fed’s new policy stance as “don’t just do something, stand there!” He added that the new approach “seems right to me.” Mr. Bernstein said domestic growth was under pressure from tighter financial conditions, the slowdown in global growth and what he called “Trumpian chaos.”
“Tightening under these conditions would be unnecessary roughness,” he said.
For the last several years, the Fed said consistently that it planned to keep raising interest rates. The pace was uncertain, but the direction was clear. Wednesday’s statement omitted previous language indicating that “some further gradual increases” would be warranted. Instead, it said the Fed would be “patient” in evaluating the health of the economy. And it suggested the Fed stood ready either to raise or to cut rates, depending on economic conditions.
Reinforcing this more cautious tone, the Fed also announced in a separate statement that it was prepared to slow or even reverse the steady slimming of its bond portfolio. This, too, was a striking shift. The Fed said in December that it was committed to steadily reducing its holdings of Treasuries and mortgage bonds, which it amassed during the financial crisis to help bolster the economy.
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. Fed officials had signaled the shift in their thinking in recent weeks, aligning on the theme of patience with unusual consistency, leaving little doubt of their intentions.
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. Still, the strength of the shift caught analysts and investors by surprise, particularly given Mr. Powell’s more hawkish comments at the end of last year.
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. While the Fed is pausing for now, Mr. Powell said he believed the central bank had raised rates to an appropriate level and had not over-tightened. “I think our policy stance today is appropriate for the state of the economy,” he said. “That’s my feeling.”
The statement also referred to the weakness of global growth and volatility in a range of financial markets. Mr. Powell did not directly address how long the Fed planned to remain patient but suggested any future rate increases would depend largely on signs of inflation, which has consistently fallen below the Fed’s 2 percent target.
“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. “I would want to see a need for further rate increases, and for me a big part of that would be inflation,” he said.
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. Brian Coulton, chief economist at Fitch Ratings, said he expected economic growth to continue and therefore he expected the Fed to resume rate increases this year. “This reads more like a pause than a strong signal that they believe that they are the end of the hiking cycle,” Mr. Coulton said. “Barring a very significant global downturn, we still see further rate increases later this year.”
“The length of this patient period is going to depend entirely on incoming data and its implications for the outlook,” he said. Others, however, said the Fed may well have raised rates for the last time during the current economic expansion. “It does feel like the top of the cycle,” said Tim Duy, an economist at the University of Oregon who follows the central bank closely. “With the economy poised to slow over the next year, the Fed is not interested in risking turning that slowdown into a recession.”
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.” The shift left some Fed watchers puzzling over why the central bank had reversed course so quickly.
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. In early October, Mr. Powell described the Fed’s benchmark interest rate as “a long way from neutral.” The comment was read by markets as implying that the Fed planned to continue raising rates for some time.
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. Mr. Powell sought to soften that impression in subsequent public appearances. After the Fed raised the benchmark rate by a quarter point at its December meeting, Mr. Powell said that the rate was at the lower end of what Fed officials consider the neutral zone: the region in which rates would neither stimulate nor restrain the economy. That implied the Fed was closer to pausing.
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. But Mr. Powell still said the Fed expected to keep raising its benchmark interest rate. And the Fed released projections showing most of its officials predicted at least two rate increases in 2019.
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. In his opening remarks on Wednesday, Mr. Powell said that the change in the Fed’s plans did not reflect “a major shift in the baseline outlook for the economy.” But he struggled to explain the Fed’s reasoning, suggesting later in the news conference that the outlook for growth had soured. He pointed to problems including tightening financial conditions, weak global growth and the government shutdown.
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. One point he made insistently was that the Fed was not taking its cues from Mr. Trump, despite the president’s constant heckling. “We’re human,” Mr. Powell said. “We make mistakes. But we’re not going to make mistakes of character or integrity.”
“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 Fed on Wednesday also sought to clarify its plans for its giant stockpile of Treasuries and mortgage bonds it accumulated in the wake of the financial crisis. A decade ago, the central bank tried to revive economic activity and reduce borrowing costs for things like cars and mortgages by cutting its benchmark interest rate nearly to zero, and by vacuuming up huge quantities of bonds.
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 Fed’s bond-buying program was intended to encourage investors to buy riskier assets, like stocks and corporate bonds, by driving up the price of safer securities, like Treasuries and mortgage-backed securities. The Fed’s enormous purchases drove down interest rates because, as competition for available Treasuries increased, buyers were forced to accept lower rates of return.
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. As the economy recovered, the Fed decided to take away that crutch and since the fall of 2017, it has gradually reduced its holdings at a pace of about $45 billion per month. But the Fed said on Wednesday that it planned to stop relatively soon, maintaining a much larger presence in the bond market than it did before the 2008 crisis.
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 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, like interest rates, but the practical difference is generally regarded as modest.
The result is a system still awash in reserves. But it is a big deal for bond markets. The Fed is the world’s largest investor, and even small changes in Fed policy make large ripples. The decision was applauded by some investors, who argue that the Fed’s withdrawal from the bond market is contributing to the volatility of asset prices. Other investors, however, want the Fed to minimize its profile in the bond market.
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. In a final bow to markets, the Fed emphasized its plans were subject to change.
“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.” “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 was even willing to increase the size of the balance sheet, if necessary.