WASHINGTON – Jan. 31, 2019 – Bye, aggressive, rate-hiking Fed. Hello, cautious, market-friendly Fed.
The Federal Reserve held its key interest rate steady Wednesday and said it will be "patient" as it weighs further hikes, signaling a new wait-and-see approach until it gets a better read on a slowing economy and volatile financial markets.
"The case for raising rates has weakened somewhat," Fed Chairman Jerome Powell said at a news conference.
"The U.S. economy is in a good place," he said, but added there's growing evidence of "crosscurrents," such as slowing growth in China.
The central bank also indicated on Wednesday a greater willingness to keep its roughly $4 trillion portfolio of government bonds elevated to prevent long-term rates from rising if the economy falters. That marks a shift from its prior plan to steadily shrink its balance sheet.
"In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments" to its key interest rate will be necessary to meet its goals of a strong economy and labor market and about 2 percent annual inflation, the Fed said in a statement after a two-day meeting.
That contrasts with its mid-December statement, which said the central bank's policymaking committee "judges that some further gradual increases" in the federal funds rate would be warranted.
Stocks surged higher Wednesday afternoon after the Fed statement, which followed strong earnings reports and forecasts from big U.S. companies. The Dow Jones Industrial Average ended the day up 435 points, or 1.8 percent, at 25,014.86.
Fed decisions are watched closely since they have wide implications for markets and the economy. Interest rates on Americans' credit cards, adjustable-rate mortgages, home equity lines of credit and some student loans directly respond to Fed moves.
Powell said Fed policymakers are considering slowing the pace of the portfolio reduction. Economist Andrew Hunter of Capital Economics now believe the Fed will stop shrinking the balance sheet when it reaches $3 billion to $3.5 billion, substantially above levels previously expected.
Powell telegraphed the central bank's warier stance in interviews this month, saying repeatedly the Fed will be "patient" and "flexible." But Wednesday's statement marks its first formal pronouncement of that view in a policy document.
It amounts to a swift turnabout for a Fed that just last month raised its benchmark interest rate by a quarter percentage point for the fourth time in 2018 to a range of 2.25 to 2.5 percent and forecast two more hikes this year.
That was a pullback from its prior estimate of three rate increases in 2019 and came amid a slowing U.S. and global economy, a trade war with China that's starting to take a bigger toll on growth and a stock market sell-off. Also, the positive effects of federal tax cuts and spending increases are expected to fade later this year.
But investors rebelled and stocks sank further after the December Fed meeting on the belief that policymakers should have indicated they were pausing in their rate hike campaign in light of the economic headwinds.
Powell and other Fed officials promptly obliged and reversed course, noting in public remarks that a tumbling market hurts consumer and business confidence and spending. Fed fund futures markets now expect no rate hikes this year.
Many economists still expect two but believe the first won't occur until June.
What it means: The Fed is trying to walk a delicate line. In an attempt to calm markets, policymakers are signaling a more tempered view of the economy and a more prudent approach toward rate hikes.
Copyright 2019, USATODAY.com, USA TODAY, Paul Davidson