Federal Reserve officials announced Wednesday that they had held their interest rate target steady and signaled that they wouldn’t raise rates at all this year.
They also announced plans to stop shrinking the Fed’s balance sheet by September, concluding the effort to reverse crisis-era stimulus.
The decision, announced following a two-day meeting in Washington, represents the central bank moving toward looser monetary policy for longer. Stocks rose sharply following the announcement.
In a statement, the officials noted that economic growth “has slowed from its solid rate in the fourth quarter.”
Accompanying projections showed the monetary policy committee marking down its expectations for economic growth, with GDP projected to come in at 2.1 percent this year, down from a previous estimation of 2.3 percent. And officials projected that the interest rate target would end the year at the same level it is now.
Chairman Jerome Powell and Fed officials have taken a dramatic about-face since December, when they raised their short-term interest rate target to a range of 2.25 percent to 2.50 percent, the highest it had been since early 2008, and forecast that they would raise rates twice more in 2019.
In the intervening months, though, a few economic indicators softened, suggesting that economic growth might slow. At the same time, inflation has remained slightly below the Fed’s 2 percent target, defying officials’ expectations that low unemployment would generate faster price gains.
Even before Wednesday’s announcement from the monetary policy committee, bond market prices indicated that investors were betting that the Fed would not raise rates again in 2019. In fact, markets suggested that a rate cut was more likely than a rate increase.
The Fed’s swing away from rate hikes came after President Trump’s harsh criticisms of Jerome Powell for raising rates, although Powell has maintained that political considerations did not factor into the change.
Wednesday’s projections suggest that Fed officials, as a group, see the pause in rate hikes as a temporary measure, and do expect to raise rates further in years ahead, to about 2.8 percent. In comparison, the target went as high as 5.25 percent in 2006. Economists and investors believe now, though, that the economy has changed, and that the market demands lower interest rates to keep spending and prices stable.
No officials dissented from Wednesday’s decision.
They separately announced their plans to slow and then halt the reductions in the balance sheet later this year. In recent months, the Fed has been allowing its holdings of government bonds to shrink by $50 billion a month to reverse the recession-era stimulus bond purchases — a policy that tightens monetary policy and also has been criticized by Trump.
The Fed’s balance sheet had risen to as high as $4.5 trillion after the last round of quantitative easing in 2015. It has since shrunk below $4 trillion as officials have allowed bonds to mature and have not reinvested the proceeds.
