US Fed now expects no rate hikes in 2019

WASHINGTON — The Federal Reserve sent a strong signal the US economy is slowing, indicating Wednesday it will not raise the benchmark lending rate again this year amid a drop in spending and broader global uncertainty.

It was an aggressive downshift that came as a shock to many economists, since as recently as September the Fed expected to raise rates three times in 2019.

"It may be some time before the outlook for jobs and inflation calls clearly for a change in policy," Federal Reserve Chairman Jerome Powell told reporters following the announcement.

And he said global growth which had been a tailwind to the US economy, had begun to slow -- notably in Europe and China where tariffs and Brexit are weighing.

The Fed's surprising change of direction follows the four rate increases last year, frequently in the face of vociferous antagonism from President Donald Trump, who called the central bank "crazy" for tightening monetary policy as the economy grew.

The change could prompt speculation that the most recent hike in December, implemented despite a Wall Street sell-off and signs of weakening economic activity, was aimed at demonstrating the central bank's independence from Trump.

The shift in the closely-watched forecast released meant nine of the 17 members of the policy-setting Federal Open Market Committee lowered their projection for this year.

But the forecast Wednesday also confirms the next move is still expected to be an increase in the key policy interest rate, though that is not now expected to come until sometime in 2020.

The explanation can be found in the stark change in language in the statement from FOMC, which voted unanimously to keep the key rate unchanged at 2.25 to 2.5 percent.

In its second meeting of the year, the committee said "growth of economic activity has slowed from its solid rate in the fourth quarter," as household and business spending is expected to drop off and annual inflation has declined. 

In contrast, in January, the FOMC said economic activity was growing at a "strong rate" and household spending continued to "grow strongly."

About-face

Powell explained the about-face, saying that, while fiscal stimulus boosted the economy in 2018, there had been "data arriving since September suggesting that growth is slowing somewhat more than expected."

But while "developments at home and around the world that bear close attention," Powell told reporters the Fed's outlook "is a positive one."

The committee members forecast a median federal funds rate this year of 2.4 percent -- the current level -- down from the 2.9 percent forecast in December, and 3.1 percent in September.

Central bankers also cut their median forecast for economic growth this year to 2.1 percent, from 2.3 percent in December. That is a sharp contrast to the expectation of more than three percent this year, forecast by the White House Council of Economic Advisers.

Wall Street fell following the announcement, with the Dow losing 0.5 percent and the broader S&P 500 dropping 0.3 percent.

Economists warned that a forecast of zero hikes could encourage markets to expect and demand a rate cut, and they warned of the potential for rising wages. 

But Ian Shepherdson of Pantheon Macroeconomics called the dovish stance an "accident waiting to happen."

It was "an unnecessarily bold move... and it runs the risk of the Fed having to reverse course in the summer," when wage pressures could pick up.

The FOMC also decided to slow the shrinking of its securities holdings -- including Treasury notes and mortgage-backed securities -- which were built up to $4.5 trillion in the years after the 2008 global financial crisis. 

Starting in May, the Fed will reduce the balance sheet by $45 billion a month, down from $50 billion previously.

But from October, it will no longer reduce its Treasury holdings, while continuing to runoff $20 billion a month of MBS, the Fed said in a separate statement.

Powell said the total holdings will fall to a bit above $3.5 trillion.

The central bank in January pledged to revisit the process after financial markets late last year were thrown into turmoil in part because of concerns the Fed was too rigid in the "balance sheet normalization" plan.

Powell also said Wednesday he did not see major risks to the financial system that could lead to another financial crisis.

"I would say overall, we don't see financial stability vulnerabilities as high," he told reporters.