Fed sees no rate hikes in 2019, sets end to asset runoff

Irving Hamilton
March 21, 2019

Federal Reserve policymakers took a dimmer view of the economy over the next three years in a set of economic projections they released Wednesday.

US stocks have posted solid gains this year with the three major indexes up at least 10 percent so far, in large part because the Fed said in January it would be "patient" in raising rates.

The comments and the Fed's about-face on monetary policy saw the greenback lose ground, with some traders betting on a rate cut rather than a rate rise next year.

The Federal Open Market Committee voted to maintain its target rate range at 2.25%-2.5% in its second official meeting of 2019.

There is also a striking contrast between the growth that Feds policymakers think the U.S. can sustain - about 2% - and what President Trump's administration believes is achievable, which is more like 3%.

He also cautioned against reading too much into committee members' forecasts of future rate hikes.

Stocks erased an early loss and turned slightly higher after the Federal Reserve forecast no rate increases at all this year, a big change from its forecast just three months ago when it expected two hikes.

In terms of interest rates, the new Fed projections knocked the number of hikes expected this year to zero from the two forecast in December, completing a pivot to a less aggressive policy in the face of an apparent jump in economic risks.

However, it wasn't until Wednesday that the Fed got an opportunity to publish a fresh version of its quarterly dot-plot, which reflects FOMC members' projections for the main interest rate over coming years in both graphs and tables.

The Fed also says it will stop shrinking its bond portfolio in September, a step that would help hold down long-term interest rates.

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Homebuilders and automakers-companies whose goods are typically financed by consumers-will be cheered by the news, as lower interest rates will stimulate borrowing.

The QE program was created to stimulate the economy by flooding the financial system with cash and depressing long-term interest rates after the Fed had cut its benchmark short-term rate to near zero in December 2008.

"Growth of economic activity has slowed from its solid rate in the fourth quarter" of 2018, the committee said in a statement.

That could become more apparent Wednesday afternoon, when the Federal Reserve is widely expected to hold interest rates steady. Higher or simply rising rates, relative to those offered by other central banks, are normally a draw for global investors and short-term speculators.

Wall Street fell following the announcement, with the Dow losing 0.5 percent and the broader S&P 500 dropping 0.3 percent. The Nasdaq edged up 5 points, or 0.1 per cent, to 7,728. US Government Bonds also have the highest income yields in the G7 by a significant margin, potentially making their expected total returns (bond income plus or minus capital gains) look healthy this year within the defensive asset complex.

Stock markets are subdued ahead of a monetary policy statement by the U.S. Federal Reserve in which the central bank is expected to say it will be patient about raising interest rates further.

The S&P 500 dropped 8.34 points, or 0.3 per cent, to 2,824.23.

The dollar fell to 110.61 yen from 111.41 Japanese yen on Tuesday.

It goes nearly without saying the Fed left its interest rate unchanged at the previous range of between 2.25% and 2.5% on Wednesday, in line with market expectations, which means it was the content of the accompanying statement and projection materials that were alway going to be most important.

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