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The Federal Reserve on Wednesday left its key interest rate unchanged and signaled it’s unlikely to cut borrowing costs in 2019, but the central bank also left itself wiggle room by saying it would “closely monitor” the economy in light of waning inflation and growing “uncertainties.”
After a two-day meeting, the Fed held its benchmark fed funds rate steady between 2.25% and 2.5%. The Fed said the labor market “remains strong” and the economy continues to expand at a “moderate” pace.
“The reality is that the economy is still in fighting shape,” said Steve Rick, chief economist at CUNA Mutual Group.
Stocks moved higher after the decision. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.22% rose 75 points. Treasury yields fell.
Still, the Fed also acknowledged “uncertainties” have increased in the past month and a half, alluding to a widening rift between the U.S. and China on trade that’s hurt American manufacturers, farmers and exporters. Hiring in the U.S. also slowed sharply in May.
At the same time, inflation has tapered off and is running below the 2% level the Fed considers healthy for the economy. The central bank cut its forecast for inflation in 2019, using its preferred gauge, to 1.5% from 1.8% — well below its 2% target.
Inflation won’t reach the central bank's 2% goal until 2021 under the Fed’s new forecast.
In a press conference, Chairman Jerome Powell said he saw little risk in waiting for more information on the economy.
“It’s important that monetary policy not overreact to any one data point,” he said.
If the economy weakens significantly or inflation goes even lower, the Fed indicated it would be prepared to act.
“The FOMC will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,” the Fed said in a statement, dropping its recent buzzword about being “patient.”
The Fed’s decision to stand still is likely to rub President Donald Trump the wrong way. Trump has been agitating for an interest-rate cut for months and the president has repeatedly criticized Powell, with the White House even going so far as to research whether it could remove him.
Fed officials themselves appear increasingly divided over the strength of the economy, the direction of inflation and what to do next.
St Louis Federal Reserve President James Bullard, who’s warned about low inflation for months, dissented in a 9-1 vote. He favored a quarter-point interest-rate cut.
The divisions run even deeper, judging from the central bank’s projections of future interest-rate moves known as the “dot plot.” Nine Fed officials predict no rate cuts this year while eight forecast one or two reductions.
Some analysts contend the Fed is conflicted about the outcome of trade talks between the U.S. and China and whether they can work out a compromise soon.
“It appears that about half of the committee is starting to panic about the risks posed by trade tensions, while the other half wants to remain ‘patient,’” said Thomas Simons, senior money market economist at Jefferies LLC.
Drew Matus, chief market strategist at MetLife Investment Management, said he doesn’t think the Fed will cut interest rates this year and that investors are missing the “conditionality” of Powell’s pledge to act.
Powell was saying, “’If things get worse, we will act.’ They are trying to calm people down without actually delivering,” Matus said.
The Fed dot plot does show a quarter-point cut in 2020 owing to a subtle shift in voting patterns, with rates rising again in 2021 to the current target of 2.4%.
The expectation that rates will rise in 2021 would seem to suggest the Fed thinks the record 10-year-old expansion will continue for at least a few more years — a sign of confidence in the economy.
The Fed stuck close to forecasts that gross domestic product will expand 2.1% this year, 2% in 2020 and 1.8% in 2021.