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What You Need to Know About Wednesday’s Fed Meeting Fed Holds Rates Steady and Predicts No Increases in 2019
(about 5 hours later)
WASHINGTON — The big question facing the Federal Reserve as it wraps up its two-day policy meeting on Wednesday is how much the central bank should worry about United States economic growth this year. WASHINGTON — The Federal Reserve left interest rates unchanged on Wednesday and showed little appetite for raising them in the near future, as officials expressed increased concern about slowing economic growth.
Fed officials are expected to leave interest rates unchanged at the conclusion of the meeting, but the day could still hold plenty of action for investors, lawmakers and other Fed watchers. All eyes will be on whether officials downgrade their economic forecast for 2019 in the face of data suggesting slowing global and domestic growth. Widening a chasm in economic optimism between itself and bullish forecasts from the White House, the Fed said in a post-meeting statement that “growth of economic activity has slowed from its solid rate in the fourth quarter.” It cited slowdowns in household spending and business fixed investment.
And close attention will be paid to comments by Jerome H. Powell, the Fed chairman, at a news conference where he is expected to provide details on when the Fed will stop winnowing its giant holdings of Treasury and mortgage securities, which it amassed during the financial crisis. Markets will also look for any signs of creeping hawkishness from Mr. Powell, who has taken pains in recent months to stress that the Fed will be “patient” before raising interest rates again. Forecasting data released at the end of the two-day meeting show the typical member of the Federal Open Market Committee now expects not to raise rates at all this year, an abrupt halt to what had been a steady march of rate increases to the current range of 2.25 to 2.5 percent. The typical member now expects a single rate increase in 2020 and none in 2021.
Here’s what to watch from the meeting and news conference: That is a sharp decline from what officials expressed in December, the last time forecasts were released. Then, Fed officials said they expected two rate increases this year and another in 2020.
The Fed last released its quarterly economic projections after its December meeting. Then, officials predicted 2.3 percent growth for the United States this year. That’s nearly a percentage point lower than what the Trump administration forecasts. But many analysts expect the Fed’s new projections to be even gloomier. Eleven committee members said they do not expect any rate increases this year. Four said they expected one. None expected a rate cut.
Morgan Stanley researchers wrote this week that they expect the Fed’s “forecast materials should show a measurable markdown to growth,” given the signs of weakness that have appeared in economic data for the first quarter. In 2020, seven members still expected no additional rate increases while four expected one total increase from the current level. Three expected two increases, and three others expected three or four increases.
[Wall Street is in a rally, figuring the Fed is done raising rates for now.] The Fed also revised down its expectations for headline inflation, which includes volatile commodities like oil and food, to 1.8 percent for the year. In December, the forecast was 1.9 percent.
Goldman Sachs has revised its estimate of first-quarter growth to 0.4 percent. Others have slightly higher numbers, but most forecasters expect slower growth than the same quarter last year, in part because of damage caused by the prolonged shutdown of the federal government. Weaker economic growth in China, along with Mr. Trump’s trade war, are also prompting concerns. Officials said they would end a wind-down of the Fed’s massive holdings of government-backed securities in September, after slowing it down in May. The Fed accumulated a massive portfolio of Treasury and mortgage-backed securities in an effort to stimulate the economy after the Great Recession but has been slowly winnowing those holdings as the economy has recovered. The Fed’s decision to end its wind-down will leave more Treasury bonds on the Fed’s balance sheet than analysts had long expected.
No one expects the Federal Open Market Committee to raise or cut rates this month. But there are lingering questions about how many rate increases officials expect for 2019. Driving the shift is officials’ mounting pessimism about the health of the United States economy, which has seen slowing growth and weakened economic data so far this year, amid fading stimulus from President Trump’s signature 2017 tax cuts, headwinds from the administration’s trade war and slowdowns in key trading partners including Europe and China.
In December, Fed officials forecast two rate increases this year. But Mr. Powell’s “patient” stance is the most concrete sign that rates are unlikely to increase much, if at all, this year. Many analysts expect Fed officials to signal this month — in a tool called the dot plot that is increasingly confounding markets — that they expect one increase, at most, this year. “Recent indicators,” officials wrote in their postmeeting statement, “point to slower growth of household spending and business fixed investment in the first quarter.”
Analysts at Bank of America Merrill Lynch wrote this week that they expect the dots to show a likely single increase this year and another in 2020, with a possibility for even fewer increases. Fed officials now forecast growth of 2.1 percent for 2019, down from a 2.3 percent forecast in December. They expect growth to fall to 1.9 percent in 2020, down from a 2 percent forecast in December. Their forecasts now include even bleaker possibilities: At least one committee member forecasts growth of only 1.6 percent for 2019. In December, the lowest forecast was 2 percent for the year.
Fed watchers also expect Mr. Powell to signal when the central bank will end its recent practice of reducing the bond holdings it piled up in the aftermath of the 2008 recession, as part of its efforts to stimulate the economy when interest rates were near zero. The White House insists growth will be much stronger: 3.2 percent this year and 3 percent next year. The gap between Fed expectations for annual growth and White House forecasts has never been wider, in the decade since the recession ended.
Last year, the Fed’s portfolio declined by more than $350 billion — the sharpest reduction since the crisis. That unwinding has unsettled financial markets. But Mr. Powell put them at ease in January with public comments that suggested an end to the great unwinding later this year. Many analysts expect him to announce Wednesday that the Fed will stop shedding its immense holdings in September. Kevin Hassett, the chairman of Mr. Trump’s Council of Economic Advisers, told reporters this week that he expects business investment growth to accelerate further this year as a result of a corporate income tax rate cut and other business incentives included in the 2017 law. He downplayed risks to growth. Administration officials have repeatedly said they are sticking with their forecast because their predictions for growth in 2017 and 2018 proved correct.
Mr. Powell has focused on communication as chairman, fielding questions in public events between meetings and upping the pace of news conferences, from once a quarter to after every meeting. Fed Chairman Jerome H. Powell has praised the strength of the economy but stressed, in several public appearances, that officials are aware of the threats to global and domestic growth that have roiled financial markets since the end of last year. The Fed statement repeats what has become Mr. Powell’s go-to description of the Fed’s strategy for such a situation: Patience.
The public events are intended to provide more transparency about the Fed’s thinking — and to limit market surprises — but Mr. Powell managed to shake investors in his December news conference with comments that many viewed as supporting more rate increases. “In light of global economic and financial developments and muted inflation pressures,” it said, “the Committee will be patient” in determining how to adjust interest rates in the future.
He will look to avoid any sort of a similar reaction on Wednesday, most likely falling back on his new “patient” pronouncement. As analysts from S&P Global Ratings put it this week: “Chairman Powell will be on a narrow rope as he fields questions during the news conference. He will purposefully re-emphasize the data-dependency mantra of the Fed, while sticking to ‘patience’ surrounding the number of rate hikes.” Analysts widely expected the Fed to hold rates steady and reduce growth forecasts, but the warnings in the Fed’s statement over growth could still spook investors.
The committee statement from the meeting will be released publicly at 2 p.m. The news conference will follow.