The U.S. Federal Reserve left its benchmark federal funds rate steady at 2.25 – 2.50 percent, as widely expected, but acknowledged economic activity has slowed and slashed its forecast for the rate path this year through 2021, with the rate seen on hold for the rest of this year.
The Federal Open Market Committee (FOMC), the Fed’s policy-making body, forecast the fed funds rate would average 2.4 percent this year, sharply down from December’s forecast of 2.9 percent, which had implied 2 rate hikes this year.
In 2020 the Fed expects to raise its rate once to an average of 2.6 percent, down from December’s projection of an average rate of 3.1 percent, and then maintain this rate in 2021.
After raising its rate 9 times since December 2015, the Fed shifted into a more dovish policy stance in early January following a sharp stock market sell-off in December.
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In January, when the Fed also kept its rate steady, the Fed said it was ready to adjust the pace of normalization of its balance sheet if economic conditions were to warrant an easier policy.
Since October 2017 the Fed has slowly been shrinking its holdings of some $4 trillions of bonds by allowing $30 billion of Treasuries and $20 billion in mortgage bonds to mature every month.
Today, the Fed said it would slow the redemptions of Treasury bonds to $15 billion a month and then stop the runoff at the end of September.
As far as mortgage bonds, the Fed will let these bonds mature and then from October reinvest the principal payments into Treasuries up to $20 billion a month as it gradually meets its longer-term aim of primarily owning Treasury securities.
In its statement, the FOMC said the labor market remains strong but economic activity has slowed from its solid rate in the fourth quarter of 2018, with data showing slower growth in household spending and business fixed investment in the first quarter.
The U.S. economy began to slow toward the end of last year, with quarterly growth in gross domestic product down to 2.6 percent from the third quarter. On an annual basis, GDP still rose 3.1 percent in the fourth quarter, the 10th consecutive quarter of growth.
As in January, the FOMC said it “will be patient” as it decides on future rate changes in light of global economic and financial developments and muted inflation pressures.
Reflecting the impact on the U.S. economy from the slowdown in Europe and China, the Fed cut its forecast for economic growth this year to 2.1 percent from its previous expectation of 2.3 percent and the 2020 forecast to 1.9 percent from 2.0 percent.
In 2021 growth is expected to decelerate further to 1.8 percent, as forecast in December.
While economic growth still remains solid, inflation has been trending downward since mid-2018, with headline inflation of 1.5 percent in February, largely due to lower energy prices.
The Board of Governors of the Federal Reserve System released following 3 statements: