Fed Signals It May Not Change Interest Rates This Year

Fed chairman Jerome Powell

Policymakers unanimously voted to keep the US interest rate range unmoved between 2.25pc and 2.5pc

The new rate view brings the Fed in line with investors who have argued the central bank would not raise rates this year.

Banks led US stocks mostly lower Wednesday after a brief rally sparked by the Federal Reserve's latest policy update faded. Many economists are now predicting the earliest the Fed may move to lift rates higher will be in December.

The Fed's pause in credit tightening is a response, in part, to slowdowns in the USA and global economies.

The central bank also said it will stop shrinking its bond portfolio in September, a step that would help hold down long-term interest rates.

A screen shows the Fed rate announcement on the floor at the New York Stock Exchange (NYSE) in New York, US. The faltering global economy, volatility in overseas financial markets and the reduced domestic inflation pressures explain, when combined together, Wednesday's policy message.

Now, 11 out of 17 Federal Reserve officials said they did not project rates to increase this year.

Above: Federal Reserve dot-plot, March 2019.

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.

The pound closed the session down 0.54 percent at $1.3195, but that was not enough to lift the dollar index after the dovish Fed statement. That negative performance is owing largely to Brexit developments.

U.S. Treasury prices edge higher, pushing the two-year yield down a basis point to 2.45% and the 10-year yield down 2 bps to 2.59%; the U.S. Dollar Index +0.1% to 96.47. But as outlooks for the economy dim, they see an increasing possibility that the Federal Reserve could actually lower interest rates in its next policy move.

So much for those worries about rising interest rates.

The Fed's more conservative outlook and lower economic growth expectations solidified some concerns over a potentially weakening economy, which was a final detractor for the day.

However, deteriorating growth might not be coming at a good time for President Trump.

Markets expect the Fed to strike a dovish tone when it meets this week, and bets on an interest rate cut have increased after weaker-than-expected manufacturing data on Friday.

"Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low", the Fed said. It says traders now put the probability of any Fed rate hike this year at just 1 percent and project a roughly one-in-four chance that the Fed will actually cut rates by year's end to help prevent a slowing economy from toppling into a recession. "They are very exposed if wage gains continue to accelerate".

USA interest rates traders piled on bets the Fed would cut borrowing costs in early 2020, with the fed funds contract for January 2020 delivery implying traders are pricing in a 48 percent chance of a rate cut at the first Fed policy meeting of 2020.

That's why emerging market currencies were crushed a year ago and global stock markets have been so volatile, because high interest rates have seen investors hearded toward the Dollar.

The Fed announced that it was keeping its benchmark rate - which can influence everything from mortgages to credit cards to home equity lines of credit - in a range of 2.25 percent to 2.5 percent.

The Fed's policy of shrinking its balance sheet has not been blameless either, because that too has hoovered Dollars up from the worldwide financial system, leading to a scarcity that has helped support the greenback's value. There were fewer changes to the language of the current release compared with the last release.

The FOMC also made a decision 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.

It's since attempted to shrink the balance sheet simply by ceasing to invest the money it receives from the government every time one of the bonds on its balance sheet matures, which is tantamount to a steady withdrawal of liquidity from the financial market. It also raises the stakes over an evolving debate about the need for fiscal, social and other policies that may be targeted to pick up the slack.

Latest News