By Greg Robb, MarketWatch
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The Federal Reserve on Wednesday signaled it’s almost done raising interest rates, saying the economy is in a “good place” and that inflation poses little threat.
Adopting a very dovish tone, the central bank’s new “dot plot” showed no increases in interest rates this year and only one in 2020, down from a total of four rate hikes in the Fed’s last forecast in December.
The Fed is “doubling down” on the dovish position first adopted in January, said Brian Bethune, an adjunct professor of economics at Tufts University.
Adding to the easy policy stance, senior Fed officials also announced they will begin to taper the runoff of the $4 trillion balance sheet in May and end it in September. That is a much quicker ending of “quantitative tightening” than anyone thought at year end. The reduction in the Fed’s balance sheet has also been viewed as a form of tightening that could weigh on the economy.
Stocks were volatile after the Fed decision. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.32% initially moved significantly off the day’s lows but then slipped back and ended down 143 points at 25,745. The yield on the 10-year note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -0.92% dropped sharply, and the dollar /zigman2/quotes/210598269/delayed DXY +0.07% moved lower, all indicating traders were taking a dovish interpretation to the decision.
Chairman Jerome Powell said the central bank can afford to be patient because the economy is growing at a steady pace, unemployment is low and inflation is tame.
“The U.S. economy is in a good place, and we will use our monetary policy tools to keep it there,” Powell said in press conference Wednesday. “It’s a great time for us to be patient and watch and wait to see how things evolve.”
The Fed held its benchmark short-term rate between 2.25% and 2.5%.
While no rate cuts were penciled in the dot plot, investors are now pricing in more than a 40% chance of a rate cut by next January. That’s up from 30% prior to the Fed decision, according to CME Group’s FedWatch Tool.
Ryan Sweet, head of monetary policy research at Moody’s Analytics, said the Fed has backed itself into a corner.
“[As] the risks to the outlook from the trade tensions, Brexit and slowing in China begin to fade, it will be difficult for the Fed to strike a more balanced bias without unsettling financial markets,” Sweet said, adding he thought the recent slowing in the U.S. economy is “temporary.”
It will take an acceleration in inflation and an increase in inflation expectations to get the Fed off the sidelines, he said.
In the press conference, Powell noted the Fed is focused on a symmetrical inflation target around 2%.
“That is really our framework,” he said.
Notable changes to the statement showed concern for the first-quarter outlook. Fed officials said growth has slowed from its solid rate in the fourth quarter and that 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%.
Fed officials trimmed their growth forecast for 2019 to a 2.1% annual rate, down from 2.3% seen in December. The economy expanded at a 2.9% rate in 2018, fueled by the Trump tax cuts and a temporary boom in federal spending. Those stimulatory effects are fading this year.
Fed officials also trimmed their forecast for headline inflation to 1.8% this year from the prior estimate of a 1.9% rate. They projected a slightly higher jobless rate as well.
The Fed’s latest statement and forecast complete a remarkable turnaround to a dovish stance.
Details of the dot plot showed 11 officials now think the Fed will not raise rates at all this year. Only four saw one hike.
Three months ago, six Fed officials thought that rates would be above 3% this year.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the Fed’s dovish tilt is “an accident waiting to happen.”
“By shifting from expecting three hikes this year as recently as last September to now expecting none, they are very exposed if wage gains continue to accelerate,” he said.