The Federal Reserve said Friday that considering a slowing global economy and last year’s financial market turmoil, the central bank plans to remain “patient” in determining when to make future adjustments to its benchmark interest rate. The Fed’s semi-annual report to Congress on monetary policy stood as opposed to its last report in July when it signaled that it was on track to continue raising rates at a gradual pace during the next 24 months.
Fed report implies few or no interest-rate increases 2019
The new report cites a variety of risks to the economy that have developed throughout the last six months, along with continued muted inflation as reasons to slow further hikes.
Many private economists believe the Fed may raise rates at most just one more time late in 2019. While some analysts are even forecasting that the next move will likely be a decline in rates as the Fed confronts a slowing economy this year.
At its last meeting in January, the Fed left rates unchanged at a level of 2.25% to 2.5% and signaled a significant pivot away from steadily raising rates by insisting that it intended to be “patient” in deciding when to raise rates again.
Various Fed officials including Fed Chairman Jerome Powell have emphasized that change in speeches since the Jan. 29-30 meeting. Powell will testify on the Fed’s Monetary Policy report before Senate and House committees next Tuesday and Wednesday.
The report noted the turbulence that hit markets in the final 90 days of last year. But unlike President Donald Trump, who tied falling stock prices to the Fed’s rate hikes, the central bank cited other variables including Trump’s trade policies.
“Financial market participants’ appetite for risk deteriorated markedly in the latter part of last year amid investor concerns about downside risks to the growth outlook and rising trade tensions between the United States and Canada,” the monetary report said.
The Fed’s decision in January triggered a significant rally in stock prices as investors grew less concerned that the Fed could over-do its tightening cycle and push the country into a recession.
The Fed had raised rates 4 times in 2018 and signaled in December that it expected to hike rates another twice in 2019.
Among the highlights of the Fed’s monetary report:
Economic growth was influenced by slower consumer spending and business investment in the second half of 2018. The housing market also weakened amid rising rates on mortgages and increased material and labor costs. A softening in consumer and business sentiment since the fall likely reflected financial market volatility and increased concerns about the global outlook.
The Fed has been trimming its balance sheet by not reinvesting some Treasury securities and mortgage-backed bonds as they mature, producing a drop in total Fed assets of about $260 billion since the middle of last year. The Fed’s balance sheet ended the year around $4 trillion, below a high of $4.5 trillion before the Fed began trimming the balance sheet in October 2007. The Fed minutes from its January meeting revealed that the central bank is close to announcing a plan for drawing the balance sheet reduction to a close.
While unemployment has fallen around a 50-year low, not all regions of the country have benefited equally with rural areas lagging behind metropolitan areas. The Fed said broader economic trends, like the ongoing shift that has favored workers with more education, has contributed to rural areas getting left behind.
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