Fed sees no rate hikes in 2019, plans to slow balance sheet reduction , Latest Business News - The New Paper

Fed sees no rate hikes in 2019, plans to slow balance sheet reduction

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US central bank expects to raise borrowing costs only once through 2021

WASHINGTON: The Federal Reserve held interest rates steady on Wednesday and its policymakers abandoned projections for further rate hikes this year as the US central bank flagged an expected slowdown in the economy.

In a major shift in its perspective, the Fed also now expects to raise borrowing costs only once more through 2021, and no longer anticipates the need to guard against inflation with restrictive monetary policy.

After a two-day policy meeting that sealed the switch to a less aggressive posture, the Fed also said it would slow the monthly reduction of its holdings of Treasury bonds from up to US$30 billion (S$40.4 billion) to up to US$15 billion beginning in May.

It said it would end its balance sheet runoff in September provided the economy and money market conditions evolve as expected.

Redemption of mortgage-backed securities would at that point be reinvested in Treasuries up to as much as US$20 billion per month, moving the Fed generally towards a Treasuries-only approach to its assets.

The combined announcements mean that, after tightening monetary policy with two levers at once over the past year, the Fed is now pausing on both fronts to adjust to weaker global growth and a somewhat weaker outlook for the US economy.

Benchmark US stock market indexes swung higher after the Fed's statement was released, and key Treasury security yields dropped to the lowest since early January.

The dollar weakened broadly against major trading partners' currencies.

"The Fed exceeded markets' dovish expectations, which took a toll on the greenback," said Mr Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

"The Fed did a big about-face on policy. The fact that the Fed threw in the towel on a 2019 rate hike was particularly dovish."

Updated quarterly economic projections released by the Fed showed weakening on all fronts compared with the forecasts from December.

Unemployment was expected to be slightly higher this year, with inflation edging down, and economic growth lower as well.

"Growth of economic activity has slowed from its solid rate in the fourth quarter," the Fed said in a policy statement that kept its benchmark overnight lending rate, or federal funds rate, in a range of 2.25 per cent to 2.50 per cent.

Fed policymakers project gross domestic product growth to slow to 2.1 per cent this year from the previous forecast of 2.3 percent, while the unemployment rate is forecast at 3.7 percent, slightly higher than the December projection. - REUTERS