Federal Reserve officials scaled back their projected interest-rate increases this year to zero and said they would end the drawdown of central bank bond holdings in September, sending benchmark Treasury yields to the lowest level in more than a year and bolstering market bets on a rate cut in 2019.
The median rate projection of Fed officials compared with two hikes in the December forecasts, which spooked investors at the time. In its statement following a two-day meeting in Washington, the Federal Open Market Committee repeated January language that it will be “patient” amid “global economic and financial developments and muted inflation pressures.”
“Patient means that we see no need to rush to judgment,” Fed Chairman Jerome Powell said in a press conference after Wednesday’s decision. “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy.”
The Fed’s signal that it will keep interest rates on hold for the full year reflects concerns that economic growth is slowing, lower energy prices are weighing on inflation and risks from abroad are dimming the outlook. The projections go further than the one-hike forecast analysts had expected in a Bloomberg survey.
“This was definitely a dovish outcome and even a bit of a surprise,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York.
Reaction in markets confirmed the dovish interpretation. Stocks reversed losses, the dollar turned lower and Treasuries rallied, with the 10-year Treasury yield dropping to the lowest in more than a year. Traders lifted the odds of the Fed cutting rates to around 48 percent.
In a separate statement Wednesday, the Fed said it would start slowing the shrinking of its balance sheet in May — dropping the cap on monthly redemptions of Treasury securities from the current $30 billion to $15 billion — and halt the drawdown altogether at the end of September. After that, the Fed will likely hold the size of the portfolio “roughly constant for a time,” which will allow reserve balances to gradually decline.
Beginning in October, the Fed will roll its maturing holdings of mortgage-backed securities into Treasuries, using a cap of $20 billion per month. The initial investment in new Treasury maturities will “roughly match the maturity composition of Treasury securities outstanding,” the Fed said. The central bank is still deliberating the longer-run composition of its portfolio and said “limited sales of agency MBS might be warranted in the longer run.”
The 10-0 decision held the target range of the federal funds rate steady at 2.25 percent to 2.5 percent.
While the central bank is very close to its twin goals of low and stable inflation and full employment, Powell and his colleagues must contend with risks from abroad, including slowing growth in Europe and China and possible spillovers from Britain’s exit from the European Union.