Federal Reserve officials announced Wednesday that they decided not to raise the central bank’s interest-rate target and suggested that they might not raise them further in the months ahead, a sign that the yearslong campaign to reverse crisis-era emergency measures is nearing an end.
The Fed’s monetary policy committee said in a statement following a two-day meeting in Washington that it would leave the target for short-term interest rates at between 2.25 percent and 2.5 percent, where it was set in December.
It also said that it “will be patient” in determining whether further increases are needed, language that indicates that it’s possible there are no more rate hikes this year.
Meanwhile, in an endorsement of the strength of the economy, the statement claimed that continued economic growth, strong labor markets, and stable inflation were the “most likely outcomes” in the months ahead.
The economy “is in a good place,” Chairman Jerome Powell said at a press conference following the announcement.
Prior to the statement, investors didn’t expect Powell and other Fed officials to raise rates again in 2019, even though the officials themselves suggested that they would. In other words, Wednesday’s decision represented an acknowledgment by the Fed that the market’s view of the economy was correct.
Stocks rose sharply following the announcement.
In recent years, the Fed has hiked rates steadily — four times in 2018 and three in 2017. Now, though, Fed officials believe that the interest-rate target may be at or near the level that would go along with a fully healthy economy. Having driven rates to near zero during the financial crisis, the Fed has now raised them about as high as they are going to go.
Rising inflation could prompt Powell and company to further raise rates and tighten monetary policy. But since last spring, core inflation — meaning inflation stripped of the volatile prices of food and energy — has been running right at, or just below, the Fed’s 2 percent target.
And there are also reasons for the central bankers to be wary, absent high inflation, of choking off further economic growth by tightening monetary policy. The biggest such sign is that recent job growth has been stronger than would have been expected at this late stage of the business cycle, indicating that there are more potential workers that could be brought into the labor market. Recent months have seen low claims for unemployment insurance, strong job growth, and rising overall employment relative to the population.
In the lead-up to Wednesday’s decision, investors were looking not just for clarity about the possibility of further rate hikes, but also for information about the Fed’s plans for further shrinking its $4 trillion balance sheet. They got a partial answer, as Fed officials said, in a separate statement, that they didn’t intend to use the size of the balance sheet to respond to try to manage the money supply, and would instead rely on the interest rate target for that purpose — but that in an emergency, they could stop shrinking the Fed’s bond holdings.
Over the past year-plus, the Fed has been slowly shrinking its portfolio of government bonds, which it amassed in rounds of “quantitative easing” meant to counteract the recession. Now, though, the Fed faces the question of just how small a balance sheet it will end up with, a major consideration for bond markets.
President Trump has criticized the Fed for shrinking its bond holdings, suggesting that by reversing the emergency stimulus measures, it is hurting the economy and undercutting his trade negotiations.
No members of the monetary policy committee dissented from Wednesday’s decision.
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