A slower economy will see the US Federal Reserve sit on interest rates this year and start slowing the reduction of its huge balance sheet in May.
The two-day March meeting of the American central bank saw the US central bank decide unanimously to keep the target range for the federal funds rate between 2.25% and 2%, where it has been since December
In fact, the Fed policymakers see just one increase in the federal funds rate next year, according to the dot plot – the now ‘famous’ graphic where Fed members see interest rates moving to in coming months and years.
That compares to the prior dot plot which showed two rate hikes this year and another in 2020. In fact, six members of the policymaking Open Market Committee saw rates rising above 3% in the December dot plot.
The transition from hawkish to dovish stance has been quite dramatic according to US economists.
The Fed said it would now be “patient” about what further “adjustments” to make to interest rates.
The news saw Wall Street shares reverse a negative trend and move back into the green, but the Dow and the S&P 500 then turned down again in the final hour of trading. Gold and oil prices rose while US bond yields tumbled. The yield on the 10-year security fell to 2.54%, down around 7 points.
The Fed Policy also announced it will begin to taper the runoff of the $US4 trillion balance sheet in May and end it in September, a move that was widely forecast and is, in fact, a slight relaxation of monetary policy.
Looking at the US economy the Fed officials also trimmed their forecast for headline inflation to 1.8% this year from a 1.9% rate in the December forecasts.
They projected a slightly higher jobless rate as well (3.7% compared to 3.8% currently) and economic growth of 2.1%, down from 2.3%. The US economy grew 2.9% in 2018, according to the last estimate.
In fact, there were some clear changes to the statement about the US economy that showed revealed concerns for the outlook for the first quarter.
Fed officials said growth has slowed from its solid rate in the fourth quarter and said there were signs of slower growth in consumer and business spending.
The statement noted that overall inflation had “declined,” while noting that core inflation, excluding food and energy prices, had remained near 2%.
In other words, inflation – both headline and core readings – will be short of the Fed’s target rate of 2%, so no need for a rate rise.