Bank holds interest rates steady

Bank holds interest rates steady


The Federal Reserve held interest rates steady Wednesday but signaled it’s prepared to cut them as soon as next month if the U.S. and China don’t reach a détente in their escalating trade war. Policymakers also unexpectedly forecast lower rates by next year.

And while the Fed’s median estimate isn’t for a rate cut this year, nearly half of Fed policymakers expect at least one. Eight of the 17 voting Fed policymakers predict as much as a half percentage point decline in rates in 2019.

In a statement after a two-day meeting, the Fed highlighted the “uncertainty” of its outlook.

“In light of these uncertainties and muted inflation pressures, the (Fed’s policymaking committee) will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market” and inflation near the Fed’s 2% goal.

That move was expected and echoes Fed Chairman Jerome Powell’s recent vow to support the 10-year-old expansion if the U.S. trade war with China deepens and poses a “downside risk” to its outlook.

For now, the Fed kept its key short-term rate at a range of 2.25% to 2.5%, and modestly lowered its economic outlook. A rate cut would mean lower costs for borrowers that have endured higher costs the past few years but also lower returns for savers who have started to benefit from higher yields.

President Trump has announced plans for a 25% tariff on the remaining $300 billion in

Chinese imports not already hit with a duty. The strategy would increase prices for everyday consumer products such as electronics, toys and clothing and ripple through the economy, possibly tipping the nation into recession.

The trade standoff has put the Fed in a thorny position because the economy otherwise is slowing but healthy. And Trump is scheduled to meet with Chinese President Xi Jinping at the G-20 summit in Japan later this month. Trump tweeted Tuesday that he had a “good” phone conversation with Xi and plans an “extended” meeting with him, propelling stocks higher.

As a result, economists expected the Fed to walk a fine line Wednesday by signaling that it’s ready to lower rates if the G-20 talks don’t head off the latest tariffs but without indicating that a rate cut is a foregone conclusion.

Analysts have termed such a rate decrease an unusual “insurance cut” because it would be designed to prevent a potential downturn in the economy that’s not yet evident in its current performance. Similar preemptive Fed rate cuts helped dodge possible recessions in 1995 and 1998.

Fed officials are inclined to take such an out-of-the-box approach because a decade after the Great Recession ended, the Fed’s key interest rate is still relatively low. That gives the central bank little room to trim rates to spur growth in case of recession.

Yet the prospect of a rate cut marks a dramatic about-face. As recently as December, the Fed had raised rates by a quarter percentage point for a fourth time in 2018 and ninth since late 2015, and forecast two more hikes this year as unemployment hovered near a 50-year low. But Fed officials reversed course and downgraded their rate hike plans after stocks plunged amid worries that the trade war and slowing global economy would hobble U.S. growth.

The specter of rate cuts raises the possibly that consumers hit with a steady rise  in borrowing costs the past few years — particularly for credit cards, adjustable-rate mortgages and home equity loans – could now see part of that increase reversed.

At the same time, bank savings rates that finally have edged up the past couple of years also could drift down if rates are lowered.

What will happen to rates?

The Fed maintained its forecast for no rate increases this year but policymakers are split, with seven projecting a half percentage point reduction in rates this year. Fed officials are also predicting a rate cut in 2020, based on their median estimate. In March, Fed officials predicted stable rates this year and a rate hike 2020.

Officials estimate the benchmark rate will remain at about 2.4% this year but fall to 2.1% by 2020.

Economists had reckoned most policymakers would be reluctant to forecast rate cuts based on potential events out of their control, such as a lack of progress in trade talks. But officials were bolder than anticipated.

Before Wednesday’s Fed statement, fed fund futures markets placed 82% odds on a Fed rate decrease in July. All told, markets are projecting two rate cuts this year and four by the end of 2020.

Economy

The Fed said “economic activity is rising at a moderate rate,” a slight downgrade from its view early last month. But it said “household spending appears to picked up earlier in the year” while business investment “has been soft.”

Fed officials kept their forecast for 2.1% growth in 2019, and raised their estimate to a 2% gain next year from their 1.9% projection in March.

The economy generally has been strong, growing at about a 3% pace both last year and in the first quarter. Growth is expected to slow in the second quarter to a still-decent 2% clip and then cool further in the second half of the year as the effects of federal tax cuts and spending increases fade. But an intensifying trade war likely would spell weaker growth.

Jobs

“Job gains have been solid, on average, in recent months, and the unemployment rate has remained low,” the Fed said.

With unemployment at a 50 year low of 3.6%, the Fed lowered its forecast for the jobless rate at the end of this year to 3.6% from 3.7%. It expects the rate to edge up to 3.7% by the end of 2020, below its March estimate of 3.8%.

Average monthly job growth has slowed from 223,000 in 2018 to 164,000 this year, including just 75,000 last month.. Analysts cite a moderating economy as well as the challenges businesses face in finding qualified employees now that the low jobless rate has spawned more worker shortages.

Yet this year’s pace of payroll gains is still about double what’s needed to offset population growth and keep lowering the unemployment rate. Meanwhile average yearly wage growth has topped 3% since mid-2018 but has edged down in recent months.

Inflation

The Fed acknowledged inflation has remained stubbornly low, giving it room to lower rates, noting one inflation gauge has declined over the past month. The Fed said it expects its preferred measure of annual inflation to stay at 1.5% by year-end before rising to 1.9% in 2020, below its March forecast of 1.8% and 2%, respectively.

It also lowered its estimate of a core reading that strips out volatile food and energy items to 1.8% this year and 1.9% in 2020, down from its March forecasts of 2% for both years.

Inflation has remained surprisingly subdued despite a pickup in pay increases that was expected to be passed along to shoppers. Powell has cited temporary factors, such as changes in the way clothing prices are measured.

Many economists, however, point to longer-term trends, such as discounted online shopping and consumers’ reduced tolerance for price increases.

What it means

Powell and the Fed took pains to walk a fine line by conveying the message that the economy is still solid but policymakers stand ready to step in with rate cuts if outside events, such as the trade war with China, intensify.

Yet officials were more aggressive in their view of rate cuts as soon as this year than expected



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *

Go Top
error: Content is protected !!