U.S. Federal Reserve holds interest rates steady

The Federal Reserve left its key interest rate unchanged Wednesday and projected no rate hikes in 2019, dramatically underscoring its plan to be "patient" about any further increases.

The Fed announced that it was keeping its benchmark rate — which can influence everything from mortgages to credit cards to home equity lines of credit — in a range of 2.25 per cent to 2.5 per cent. It also said it will stop shrinking its bond portfolio in September, a step that should help hold down long-term interest rates.

Together, the moves signal no major increases in borrowing rates for consumers and businesses. Some analysts believe the next rate move could be a cut later this year if the economy slows as much as some fear it might.

In signalling no rate increases at all this year, the Fed's policymakers reduced their forecast from two that were previously predicted in December. They now project one rate hike in 2020 and none in 2021.

The Fed's pause in credit tightening is a response, in part, to slowdowns in the U.S. and global economies. It says that while the job market remains strong, "growth of economic activity has slowed from its solid rate in the fourth quarter."

Fed officials expect economic growth of just 2.1 per cent this year, down from its previous projection of 2.3 per cent growth.

Done raising rates for now?

The shift toward a more hands-off Fed and away from a policy of steadily tightening credit has encouraged the view that the central bank is done raising rates for now and might even act this year to support rather than restrain the economy. Though the U.S. economy is on firm footing, it faces risks from slowing growth and trade conflicts.

Those factors suggest that the Fed may recognize that it went too far after it met in December. At that meeting, the Fed approved a fourth rate hike for 2018 and projected two additional rate increases in 2019.

Chairman Jerome Powell also said he thought the balance sheet reduction would be on "automatic pilot."

That message spooked investors, who worried about the prospect of steadily higher borrowing rates for consumers and businesses and perhaps a further economic slowdown. The stock market had begun falling in early October and then accelerated after the Fed's December meeting.

U.S. President Donald Trump — injecting himself not for the first time into the Fed's ostensibly independent deliberations — made clear he wasn't happy, calling the December rate hike wrong-headed. Reports emerged that Trump was even contemplating trying to fire Powell, who had been his hand-picked choice to lead the Fed.

A change in course

But after the December turmoil, the Fed in January began sending a more comforting message. At an economic conference soon after New Year's, Powell stressed that the Fed would be "flexible" and "patient" in raising rates — a word he and other policymakers have invoked repeatedly since — and "wouldn't hesitate" to change course if necessary.

Powell, appearing last week on CBS's "60 Minutes," denied that pressure from Trump had influenced the Fed's policy shift. Private economists generally agree that a slowing economy and a sinking stock market, which eased Fed worries about any possible stock bubble, were more decisive factors.

During Wednesday's news conference, Powell sidestepped a question about why the U.S. central bank is significantly less bullish about U.S. economic growth than the Trump White House.

Fed officials are estimating growth of 2.1 per cent, a full percentage point lower than the estimates from White House aides. That is a difference of roughly $200 billion in growth, with Trump officials suggesting that the tax cuts approved at the end of 2017 will continue to bolster faster economic gains.

Despite multiple reports about Trump's high expectations for growth, Powell says he was unfamiliar with the figures.

"I haven't seen their projection," he said at a news conference. "I wouldn't comment on their projection."

After sharply falling in December, stocks have rallied and recouped most of their late-year losses in trading since the start of 2019, a rebound credited largely to the Fed's easier monetary stance.

Some analysts say they think the Fed won't raise rates at all this year if the outlook becomes as dim as they are forecasting.

That view is supported by the CME Group, which tracks trading in futures contracts on the Fed's benchmark rate. It says traders now put the probability of any Fed rate hike this year at just 1 per cent and project a roughly one-in-four chance that the Fed will actually cut rates by year's end to help prevent a slowing economy from toppling into a recession.