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Fed keeps rates unchanged as it takes 'decidedly dovish' shift


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Fed keeps rates unchanged as it takes 'decidedly dovish' shift

The Federal Reserve extended its dovish pivot on March 20, keeping its benchmark interest rate unchanged and signaling its next rate hike may not come until 2020.

The Fed also announced a plan to slow its efforts to reduce its $4 trillion balance sheet, saying its current program of cutting its assets each month will wrap up at the end of September and leave the Fed with slightly more than $3.5 trillion in assets.

The developments mark a significant reversal from last year for the central bank, which has flagged slower growth abroad as a risk to the U.S. economy. The underlying fundamentals for the U.S. are "still very positive" even if growth slips somewhat, but officials will remain patient on rates for now to see how the downside risks evolve, Fed Chairman Jerome Powell said at a news conference.

"We don't see any data pushing us to move rates in either direction, and we're going to watch carefully and patiently as we allow events to evolve," Powell told reporters. "And when they do clarify, we will act appropriately."

Stocks surged after the Fed announcement but ended up dipping slightly to close the day, with the Dow Jones Industrial Average slipping 0.55% to 25,745.67.

The Fed's decision will keep its benchmark federal funds rate at a target range of 2.25% to 2.5%, and most Fed officials support keeping it there for the remainder of the year, according to their latest round of projections.

That marks a shift from December 2018, when the median projection from Fed officials indicated they were penciling in two hikes this year. Eleven officials now support keeping rates unchanged this year, while six of them support raising rates at least once. Analysts had generally expected the latter camp would be larger than the no-hike group.

"The Fed has turned decidedly dovish. In fact, every surprise today relative to expectations was dovish," Stephen Stanley, chief economist at Amherst Pierpont Securities, wrote in a note to clients.

The Fed's post-meeting statement signaled that economic data have come in weaker so far this year, with officials saying that "growth of economic activity has slowed from its solid rate in the fourth quarter" of 2018. The U.S. economy had grown by 2.6% that quarter, estimates show, down from a 3.4% reading the previous quarter.

Fed officials' median projection for GDP growth in 2019 slipped to 2.1% in the new projections, down from their 2.3% median forecast at the end of last year.

The Fed is "carefully monitoring" whether several global issues could dent those forecasts further, Powell said, noting that Brexit discussions and trade negotiations between the U.S. and China are still unresolved. Growth in Europe and China has also "slowed substantially," a development that will have at least some effect on the U.S. economy, the Fed chief said.

But U.S. fundamentals are "still very strong," with the labor market continuing to strengthen, wages rising and household surveys showing a rebound in confidence, he said.

For 2020, ten officials support raising rates at least once, a large enough contingent to shift the median view at the Fed to one rate hike. Seven officials, though, indicated they would favor keeping rates flat next year.

"In other words, the forecast of a rate hike next year is a close call," wrote Jay Bryson, global economist at Wells Fargo Securities.

In another dovish change, Fed officials are no longer projecting any need to put their benchmark rate above neutral over the next three years. At that level, the central bank would begin tapping the brakes on economic growth in an attempt to guard against unhealthy inflation increases. Officials are projecting their preferred inflation gauge will sit right at the central bank's 2% target over the next three years.

Fed to end balance sheet unwind at end of September

The Fed also provided details on the future of its $4 trillion balance sheet, which the Fed had bulked up with Treasurys and mortgage-backed securities to try to boost the economy after the financial crisis.

The balance sheet had peaked at around $4.5 trillion, but the Fed began cutting its assets by up to $50 billion a month in 2017. The Fed said it will conclude the asset reductions at the end of September, which Powell said would put the balance sheet "a bit above $3.5 trillion."

The central bank has currently been reducing its Treasury holdings by up to $30 billion every month, though officials said they will reduce the monthly cap to $15 billion starting in May.

The Fed has also been trimming its mortgage-backed securities holdings by up to $20 billion a month. That pace of run-off will continue for now as officials shift to a portfolio that consists largely of Treasurys, the Fed said.

"We believe that these plans will facilitate a predictable, transparent and smooth process, and we will make additional adjustments if conditions warrant," Powell told reporters.