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United States Monetary Policy March 2019

United States: Fed signals halt to rate hikes this year and downgrades growth forecasts

At its 19-20 March monetary policy meeting, the Federal Reserve’s Open Market Committee (FOMC) unanimously voted to maintain its target range for the federal funds rate at 2.25%–2.50%. Aside from the widely expected rate decision, the March policy meeting was particularly noteworthy because FOMC members signaled they now expected no more rate hikes this year, confirming a dovish shift that started at its December meeting—after coming under pressure from tumbling markets. Moreover, after hinting at doing so in January, the Fed confirmed in March it was tapering off its program of balance sheet reduction and planned to end the program by September 2019. Together, these moves represented a dramatic U-turn in Fed policy, reflecting a gloomier global growth outlook and significantly weakening domestic momentum.

In its latest communiqué, the Fed pointed out that growth slowed in Q4 2018 and that “recent indicators point to slower growth of household spending and business fixed investment in the first quarter”. It also noted that payroll growth, while still solid on average, was close to nonexistent in February—an important sign given that labor market gains have underpinned the strong economic growth of past quarters. This new data also echoes recent and large downward revisions to growth forecasts in Europe and Asia, suggesting a broad global slowdown; FOMC members’ economic projections reflected this trend. The Fed’s median growth forecast for 2019 was lowered to 2.1% in March (December projection: 2.3%), with 2020 growth also downgraded to 1.9% (December projection: 2.0%), and unemployment forecasts for both years up 0.2 percentage points to 3.7% and 3.8%, respectively.

As for the FOMC’s interest rate projections —the Fed’s “dot plot”—the shift was even more dramatic. While in December, a large majority of members—15 out of 17—expected between one and three rate hikes in 2019, as of March only six members were now expecting one or two hikes this year, with the remaining 11 betting on the status quo. While the median projection now indicates one rate hike in 2020 and none the following year, a handful of FOMC members expect rates to remain unchanged until the end of 2021, signaling that the tightening cycle could be definitively over. Further hammering home that point, Fed Chair Jerome Powell left open the possibility that the next policy move could be a rate cut, not a hike.

In tandem, the Fed also released a detailed plan for tapering its balance sheet reduction. It intends to reduce its monthly asset sales from USD 30 billion to USD 15 billion beginning in May 2019, and to stop it altogether by the end of September 2019. This would leave the Bank with around USD 3.8 trillion on its balance sheet, several hundred billion dollars more than what market participants would have expected just a few months ago.

Looking ahead, several of our panelists expect the Fed’s patient stance to carry well into next year. For Nomura analysts, the March meeting was “consistent with our view that the Fed will essentially be on hold through end-2020”. James Knightley, economist at ING, concurred, noting that “for now, the Federal Reserve is still signalling a bias to tighten policy given the rate hike penciled into 2020. But with a presidential election later in the year and President Trump keen to gain political capital out of challenging the Fed on any rate hikes, we are sceptical that would happen”. This opinion, however, is not unanimous: Goldman Sachs analysts, for example, “now expect the next rate hike to come in 2020Q1, instead of 2019Q4” and still “see a strong possibility of another rate increase in 2021”.

United States Interest Rate Forecast

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