The Federal Reserve is no longer in a hurry to raise interest rates in 2019, a change likely to please President Trump and Wall Street investors who urged the central bank to hit the pause button on future rate increases.
The Fed opted Wednesday to leave interest rates unchanged — at a range of 2.25 to 2.5 percent — and the central bank signaled it was unlikely to hike rates soon, a big shift from December when the Fed predicted two more rate increases this year. The central bank pinned the change on the uncertainty around the slowdown in China and Europe as well as what would happen with Brexit, U.S.-China trade talks and any further government shutdowns.
“Over the past few months, we’ve seen some crosscurrents and conflicting signals about the outlook,” Fed Chairman Jerome H. Powell said. “We believe we can best support the economy by being patient before making any future adjustment to policy.”
Trump called the Fed “loco” for raising interest rates so much last year and was so angry after the December hike that he asked close advisers whether he could fire Powell, an unprecedented move that top White House officials later said wasn’t legally possible.
Powell strongly dismissed the notion that the Fed caved to Trump’s demands.
“The only thing we care about at the Fed is doing our job for the American people and using our tools appropriately. That is very strongly our culture,” Powell said at a news conference following the interest rate announcement. “We’re never going to take political considerations into account or discuss them as part of our work.”
The stock market surged after the Fed announced it would be “patient,” with the Dow jumping 1.8 percent, or 435 points, to close at 25,015. The Standard & Poor’s 500-stock index was up 1.6 percent, and the tech-heavy Nasdaq climbed 2.2 percent.
Trump tweeted when the market closed, “Dow just broke 25,000. Tremendous news!”
“The president was reeling against the Fed when I spoke with him this month,” said Stephen Moore, an economic adviser on Trump’s campaign who remains close to the president. “What the Fed did in December was an outrageous mistake. It sounds like the Fed has admitted the errors of their way."
The central bank also put out a separate statement saying it was prepared to adjust its plans for bringing down its balance sheet, another signal of greater caution and that the Fed is paying attention to Wall Street. Markets tanked after Powell said in December that the balance sheet was on “autopilot.”
Most of Wall Street is now pricing in zero rate increases this year out of fears the economy is slowing dramatically, according to the FedWatch tracker, and Trump has repeatedly told the Fed to stop raising rates. For now, the Fed is on hold, although the central bank has left open the possibility of increases later in the year.
“The FOMC has gone all in, more or less, on the idea that the head winds facing the economy mean that the hiking cycle is over,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note to clients. He added that the Fed’s statement “oozed dovishness, for no apparent reason; what has changed?”
Powell said the central bank is “patiently awaiting greater clarity” on matters such as Brexit, the trade dispute with China, the impact of the partial government shutdown and the markets. He said the case for additional rate hikes had “weakened somewhat.”
“In light of global economic and financial developments and muted inflation pressures, the [Fed] will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,” the Fed said in its official statement.
The language in the statement marked a significant change from December when the central bank was still saying that “further gradual increases” in rates would probably be necessary.
The Fed has predicted that growth will slow from about 3 percent last year to 2.3 percent this year, a pace that is robust but noticeably less than that of 2018.
Wall Street remains on edge, believing it will be easier for the economy to fall off track as growth slows.
“We think a sharp economic slowdown over the course of this year means the Fed will be cutting rates at the beginning of 2020,” said Michael Pearce, senior U.S. economist at Capital Economics.
The Fed described the U.S. economy as “solid,” a slight downgrade from last year when the central bank called it “strong,” but Fed leaders remain upbeat and said the most likely path for the economy is sustained growth, low unemployment and modest inflation.
“The U.S. economy is in a good place,” Powell said. “Generally speaking, we think the outlook is still favorable.”
The Fed also put out a separate statement Wednesday saying it will continue its gradual whittling of its balance sheet — the roughly $4 trillion in Treasurys and other assets the central bank bought in the aftermath of the financial crisis. But the Fed indicated it is “prepared to adjust” its plans by altering the size and composition of its holdings “in light of economic or financial developments.”
“The Fed gave a strong message to markets that it won’t derail the expansion this time,” said Diane Swonk, chief economist at Grant Thornton. “But we’re in uncharted waters that are getting more complicated by all the political uncertainty at home and abroad.”