WASHINGTON – The Federal Reserve on Wednesday suggested it would not raise interest rates in 2019, a dramatic about-face that suggested the central bank’s worries about the economy are intensifying.
“Growth is slowing somewhat more than expected,” Fed Chairman Jerome Powell said at a news conference. “While the U.S. economy showed little evidence of a slowdown in 2018, the limited data we have so far this year have been somewhat more mixed.”
The Fed cut its growth forecasts to 2.1 percent for this year and 1.9 percent in 2020, significantly below the White House predictions of 3.2 percent this year and 3.1 percent next.
The Fed entered this year predicting the economy would grow 2.3 percent and two more rate hikes would be necessary to keep the economy from overheating, but the Fed pulled back significantly a few weeks later as European and Chinese outlooks deteriorated and U.S. consumers and businesses showed signs of much less spending.
Those concerns have been echoed as companies like FedEx slash earnings forecasts and trucking volumes have declined since the start of the year.
President Donald Trump and Wall Street have urged the Fed to not raise rates. Trump argued that the Fed’s rate hikes were spooking the stock market and causing people to hold off on investments.
Investors initially approved of the Fed’s latest action and Powell’s remarks at the news conference. The Dow Jones industrial average had plunged 200 points before Powell began speaking, but it swiftly reversed course and sailed into positive territory by the time Powell concluded.
The Fed also announced that it would conclude its balance-sheet reduction by September, a relief for Wall Street and in line with what Trump wanted. The actions Wednesday signal that the Fed will do whatever it can to keep the current expansion going.
Interest rates are at a range of 2.25 percent to 2.5 percent, the highest level in a decade but still low by historical standards.
While the Fed is predicting slower growth in 2019, Powell indicated that 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 keep it there,” he said.
The Fed stressed that it would be “patient” on future rate hikes because leaders of the central bank want to see how the economy evolves in the coming months and inflation remains low.
Trump has repeatedly urged the Fed not to raise rates, and he was so angry with Powell after the central bank raised interest rates in December that he asked close confidants whether he could fire Powell, according to people familiar with the matter. Most experts think it is not possible for the president to remove Powell, whom Trump nominated for a four-year term.
The Fed also announced plans to halt the slim-down of its balance sheet, the $4 trillion in assets the central bank holds, at the end of September. It will start slowing the balance-sheet runoff in May.
The Fed said it wants to leave “an ample supply of reserves” in the financial system.
The central bank has been gradually reducing its asset portfolio since 2017, and there was concern from Trump and Wall Street that this was starting to worry markets because it reduces the amount of liquidity in the financial system.
Many on Wall Street want the Fed to stop reducing its balance sheet soon. They see the slim-down as akin to more interest rate increases.
“The Fed is still tightening monetary policy. They are still removing accommodation even after nine rate hikes by a decrease of their asset portfolio,” said Michael Farr, head of investment firm Farr, Miller & Washington. “To be fully neutral, they need to stop that.”