The Federal Reserve on Wednesday suggested it would not raise interest rates in 2019, a dramatic about-face that indicated the central bank’s worries about the economy are intensifying.
The Fed entered the year expecting growth of 2.3 percent and that two rate hikes would be necessary to keep the economy from overheating, but on Wednesday it cut its growth forecast to 2.1 percent for 2019 and signaled it was done hiking rates for the year.
The Fed pulled back from its plan to raise interest rates as Europe and China deteriorated economically and U.S. consumers and businesses showed worrying signs of lower spending. Those concerns have been amplified as companies such as FedEx predict a mediocre year and trucking volumes have declined.
The Fed’s new projections widened the already large gap between its growth estimates and those coming from the White House, which is predicting 3.2 percent this year and 3.1 percent the next. Powell declined to comment on the gulf between the outlooks, but most outside experts view the administration’s predictions as overly rosy.
President Trump and Wall Street have urged the Fed not to raise rates anymore. Trump argued that the Fed’s hikes were spooking the stock market and causing people to hold off on investments. Powell has insisted the Fed’s decisions are independent of politics, although he did acknowledge that leaders of the U.S. central bank have monitored markets “carefully,” especially after the financial crisis.
Investors initially cheered the Fed’s latest actions. The Dow Jones industrial average rallied 200 points during Powell’s news conference, but by the end of the day many began to wonder whether this was a signal that the U.S. economy is starting to catch whatever ailment much of the rest of the world has. The Dow closed the day with a 142-point loss.
“Powell is beginning to spook the market. There were lots of ‘What does the Fed know that is so troubling?’ tweets today,” said Peter Atwater, president of Financial Insyghts.
Trump deepened the hurt when he said he may leave his tariffs on Chinese goods for a “substantial period of time” even after the two countries reach a trade deal.
While Powell has been hesitant to criticize Trump, the Fed chair said Wednesday that the uncertainty of trade deals and what will happen as Britain tries to exit the European Union are weighing on businesses and muddling the outlook, another reason the Fed has decided to pause interest rates at the current range of 2.25 to 2.5 percent. It’s the highest level in more than a decade but still low by historical standards.
The Fed also announced it would stop reducing its $4 trillion asset portfolio by September, a relief for Wall Street and in line with what Trump wanted, but yet another signal that the Fed felt the need to tread gently with its other key policy tool.
While the Fed is predicting significantly slower growth in 2019, Powell indicated there was little worry about a recession.
“The U.S. economy is in a good place, and we will continue to use our monetary policy tools to help keep it there,” Powell said, emphasizing “strong” underlying fundamentals.
Unemployment remains low, and there is little concern that inflation will spike anytime soon, which gives the Fed time to see what plays out. The U.S. economy has often had a weak first quarter — almost a winter blues — and then a spring bounce as consumers and businesses spend again.
The kind of growth the Fed now predicts for this year resembles the Obama economy, a solid but not spectacular trajectory that should enable more people to find jobs and negotiate for higher pay.
“The [Fed] is attempting to engineer a soft landing for an economy that rapidly decelerated during the first quarter of 2019 amid global economic headwinds, volatility across asset space, and policy risks associated with U.S. trade policy,” Joseph Brusuelas, chief economist at RSM, wrote in a blog post.
Trump has repeatedly urged the Fed not to hike interest rates anymore, and he was so angry with Powell after the central bank raised rates in December that he asked close confidants whether he could fire Powell, according to people familiar with matter. Most experts say it is not possible for the president to remove Powell, whom Trump nominated for a four-year term.
What appears to have sparked the change in the Fed’s course of action is the rapid market decline at the end of December. Many on Wall Street wanted the Fed to stop reducing its balance sheet, saying it was akin to more interest rate increases.
In December, Powell said the balance sheet reduction was on “autopilot.” On Wednesday, the Fed changed course, announcing it would slow down its portfolio slimming in May and then stop altogether by the end of September. Powell said the final level of the Fed balance sheet is likely to be “a bit above $3.5 trillion."
The Fed went on an asset-buying spree during the financial crisis in an effort to pump more money into the banking system and lower interest rates, a process known as “quantitative easing.” The balance sheet ballooned from under $1 trillion to an unprecedented $4.5 trillion by 2017 when the Fed announced it would slowly and gradually try to bring that amount down. Now, the end is in sight.
Many of the Fed’s top leaders foresee one interest rate increase in 2020, but experts say the central bank is probably done raising rates in this expansion.
“It seems unlikely that after a prolonged period of pause the [Fed] would go back to hiking 12 months later,” Lindsey Piegza, chief economist at investment firm Stifel, wrote in a note to clients. “Historically, after the Fed takes to the sidelines, the next course of action is a reduction in rates.”