The US Federal Reserve sent a strong signal the US economy is slowing, indicating on Wednesday that it would 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 last year the Fed expected to raise rates three times this year.
“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.
Photo: Reuters
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 US 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 last year, implemented despite a Wall Street sell-off and signs of weakening economic activity, was aimed at demonstrating the 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 (FOMC) lowered their projection for this year.
The forecast also confirmed 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 next year.
The explanation can be found in the stark change in language in the statement from committee, 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.
Powell explained the about-face, saying that, while fiscal stimulus boosted the economy last year, there had been “data arriving since September suggesting that growth is slowing somewhat more than expected.”
While “developments at home and around the world that bear close attention,” Powell told reporters at a news conference that 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 3 percent this year, forecast by the White House Council of Economic Advisers.
The FOMC also decided to slow the shrinking of its securities holdings — including Treasury notes and mortgage-backed securities (MSB) — which were built up to US$4.5 trillion in the years after the 2008 global financial crisis.
Starting in May, the Fed will reduce the balance sheet by US$45 billion a month, down from US$50 billion previously.
However, from October, it will no longer reduce its Treasury holdings, while continuing to runoff US$20 billion a month of MBS, the Fed said in a separate statement.
Powell said the total holdings will fall to a bit above US$3.5 trillion.
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