Fed Says “No” to Rate Hikes While Futures Traders See Nearly 50% Chance of Rate Cut
The U.S. Federal Reserve kept its benchmark interest rate unchanged on Wednesday as widely expected and said in its monetary policy statement that it doesn’t expect to hike rates for the rest of the year. That’s a major change from its December policy statement when it said it expected to raise rates at least two times. Furthermore, Federal Reserve Chairman Jerome Powell said he expects a “slowdown” but not a recession. Additionally, the central bank also expects the U.S. economy to expand at 2.1 percent this year, below its previous projections.
Benchmark Interest Rate
The Fed announced it was holding its benchmark interest rate inside its current range of 2.25 percent to 2.5 percent and trimmed its expectation of two rate hikes this year to none. It also said it projects one quarter-point rate hike in 2020 and none in 2021.
Monetary Policy Statement Changes
In its policy statement, the Fed said that the job market remains “strong” but noted that “growth of economic activity has slowed” since late 2018.
Balance Sheet Adjustment Changes
The Fed also said it will stop reducing its bond portfolio in September. Shrinking the balance sheet is a form of monetary policy tightening. The new move by the Fed is a step that would help hold down long-term interest rates.
Net Effect of the Changes
Combining the new policies means no more major increases in borrowing rates for consumers and businesses. Furthermore, it opens the door for a potential rate hike later this year if the economy slows as much as some analysts fear.
Financial market traders have become more convinced that the Federal Reserve will be more accommodative on interest rates.
“The fed funds futures market is assigning a 47.8 percent probability of at least one rate cut by January 29, 2020,” according to the CME’s FedWatch tool.
Futures contracts are also implying a 39 percent probability of a rate decrease by December 11, up from only 23 percent before the Fed’s policy decision at 18:00 GMT on Wednesday.
External Factors Influence Fed Decisions
One reason for the Fed’s pause in credit tightening is in response to a slowdown in the U.S. economy. “We foresee some weakening, but we don’t see a recession,” Federal Reserve Chairman Jerome Powell said Wednesday in a press conference. The Fed also said that while the labor market remains strong, “growth of economic activity has slowed from its solid rate in the fourth quarter.” The Fed also said that a slowdown in the global economy also contributed to its decision to stop its rate hikes in 2019.
Powell Remains Upbeat
Shrugging off the recent dip in U.S. economic growth, Fed Chair Powell said that U.S. “economic fundamentals are still very strong,” adding that Fed officials “see a favorable outlook for this year.”
Fed policymakers also said that they expect the U.S. unemployment rate, now at 3.8 percent, to tick down to 3.7 percent by year-end.
This article was originally posted on FX Empire
