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WASHINGTON – The US Federal Reserve has declared itself increasingly concerned about slowing economic growth because it left interest rates unchanged on Wednesday and showed little eagerness to raise them in a close future.
The Fed's rather disappointing economic assessment runs counter to the White House's optimistic economic projections, which have continued to predict stronger growth than most forecasters believe is likely. In a statement issued at the end of its two-day political meeting, the Fed said that "the growth of economic activity has slowed relative to its strong rate in the fourth quarter" and referred to the slowdown household spending and fixed investment companies. Fed officials are now expecting economic growth of 2.1 percent for 2019, down from 2.3 percent in December.
The White House insists that growth will be much stronger: 3.2% this year and 3% next year. The gap between the Fed's expectations for annual growth and the White House's forecasts has never been greater, in the decade that followed the end of the recession.
After raising rates for five consecutive quarters, the Fed said it no longer saw the need to raise them again in the near future. The forecast data released at the end of the two-day meeting show that the typical member of the Federal Open Market Committee is now expecting to stop raising rates this year, which is a sharp stop to had been a steady increase in rates at the current range. from 2.25 to 2.5%. The typical member is now expecting a single rate increase in 2020 and none in 2021.
This is a clear decrease from what the officials expressed in December, the latest release of forecasts. Then, Fed officials said expect two rate hikes this year and another in 2020.
At a press conference held after the meeting, Fed Chairman Jerome H. Powell said the Fed "should grow at a brisk pace" in 2019, but that it will be slower than the rapid acceleration of last year. Mr. Powell said that data arriving since December "suggest that growth slows a little more than expected".
Mr. Powell did not rule out the possibility – depending on the current state of the economy – that the next Fed decision would be a rate cut. "The data does not currently send a signal that we need to move in one direction or another," he said.
The 10-year Treasury note yields – an indicator of a range of consumer borrowing rates – fell sharply after the release of the Fed's statement as investors digested the potential for no rate hike time. Shortly after 2:30 pm the 10-year yield was just below 2.54%, its lowest level since January 2018. The equities, which had been negative for most of the day, rebounded and returned to positive territory. after the announcement.
Eleven committee members said they did not expect rate increases this year. Four said that they were expecting one. Nobody expected a rate reduction.
By 2020, seven members still did not anticipate any further rate increases, while four predicted a total increase from the current level. Three had two increases and three more, three or four.
The Fed also revised down its global inflation forecast, which includes volatile commodities such as oil and food products, to 1.8% for the year. In December, the forecast was 1.9%.
Officials said they would stop easing the Fed's massive holdings in September after slowing them down in May. The Fed has accumulated $ 4.5 trillion in Treasury securities and mortgage-backed securities to stimulate the economy after the Great Recession. He slowly earned these assets as the economy recovers. The Fed's decision to end its liquidation will leave the Fed's balance sheet with more Treasury bonds than analysts had long expected, which should give the Treasury more leeway to react if the economic situation was deteriorating.
The growing pessimism of US officials about the health of the US economy has been marked by slowing growth and weakening economic statistics this year, under the effect of the gradual reduction in tax cuts signed by President Trump in 2017, the trade war and the slowdown in administration in major trading partners, including Europe and China.
"Recent indicators," officials wrote in their statement, "indicate a slowdown in household spending growth and fixed investment by businesses in the first quarter."
Fed officials expect growth of 1.9% in 2020, compared to 2% in December. Their forecasts now include even darker possibilities: at least one member of the committee expects a growth of only 1.6% in 2019. In December, the lowest forecast was 2% for the year.
Powell said consumer spending and business investment are showing signs of weakness and that average monthly job growth, while strong, "appears to be slowing slightly relative to the pace from last year ".
Kevin Hassett, Chairman of Trump's Economic Advisers Council, told reporters this week that he expects business investment growth to accelerate as a result of a lower corporate tax rate and a reduction in corporate tax rates. other business incentives provided for in the 2017 law. He downplayed the risks to growth. The administration officials repeatedly said that they were sticking to their forecasts, as their growth forecasts for 2017 and 2018 were correct.
Powell praised the strength of the economy, but said in several public appearances that officials are aware of the threats to global and domestic growth that have shaken financial markets since the end of last year. The Fed statement reiterates what Powell has become the benchmark description of the Fed's strategy in such a situation: Patience.
"Given the changing global economic and financial situation and moderate inflationary pressures," he said, "the Committee will be patient" to determine how to adjust interest rates to l & # 39; future.
Analysts were widely expecting the Fed to maintain rates and cut growth expectations, but warnings from the Fed's statement on growth could still scare investors.
Powell tried to reassure the markets by saying that "the fundamentals of the economy were still solid," but added that recent developments, both domestically and internationally, have a brake on growth.
"We are witnessing a situation of substantial slowdown in the European economy," he said, adding that the Chinese economy has also weakened.
Many analysts also expected officials to announce the end of September of the liquidation announcement, recently announced by Powell in a speech at Stanford University. This move will begin with a slowing down of balance sheet cuts in May. By October, the Fed will change the composition of the balance sheet by abandoning agency debt and mortgage-backed securities for the benefit of Treasury bonds.
Officials seemed eager to end the balance sheet reduction under pressure from the financial markets. Many analysts have blamed stock market volatility in December and January for the Fed's liquidation process.
In announcing the end of the reduction, Fed officials acknowledged that they did not live up to the expectations of many analysts at the beginning of the reduction. They stated that the total assets on the balance sheet once the liquidation is complete, "will probably remain slightly above the level of the reserves needed to implement monetary policy effectively".
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