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The U.S. economy keeps chugging along but overseas risks continues to hover, and that’s helping keep the Fed in wait-and-see mode.
As widely expected, the Federal Reserve held interest rates steady Wednesday, following through on its vow late last year to stand pat barring a “material” change in its outlook.
In a statement after a two-day meeting, the Fed said it would leave its benchmark federal funds rate at a historically low range of 1.5% to 1.75% after cutting it by a quarter percentage point three times last year amid trade tensions and sluggish global growth that increased the risk of recession.
Fed Chair Jerome Powell has said the so-called insurance cuts kept the economy on solid footing and no further decreases were needed unless the outlook darkened.
In its statement Wednesday, the Fed said “the labor market remains strong” and “economic activity has been rising at a moderate rate.”
Since the Fed’s last meeting in December, consumer spending has slowed but continued to perform well while business investment remains sluggish. And although manufacturing has contracted for five straight months, industrial output has picked up somewhat and housing starts have increased sharply as a result of low mortgage rates.
Economists surveyed by Bloomberg expect the government on Thursday to report the economy grew at an annual rate of 2.2% in the fourth quarter. And those polled by Wolter Kluwer Blue Chip Economic Indicators predict 1.9% growth next year. Both estimates mark a slowdown from the nearly 3% gain in 2018 – a pace bolstered by President Trump’s tax cuts and government spending increases — but are higher than prior forecasts.
At the same time, the Fed noted Wednesday that inflation remains below its 2% target. Powell has said it would take “a significant increase in inflation” for the Fed to raise rates.
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Some of the risks that worried Fed officials last year have eased. The Trump administration has reached a “phase 1” trade agreement with China. Congress has passed a new trade deal with Mexico. And the odds of a chaotic British withdrawal from the European Union have dropped.
But new hazards have emerged, Barclays says. The coronavirus threatens to crimp growth in China and other parts of Asia and could jeopardize the U.S. economy if it spreads. U.S.-Iran tensions persist. Boeing has halted production of its 737 MAX at least until summer after two fatal crashes, a development that Moody’s Analytics says will trim nearly half a percentage point off growth in the current quarter. And there’s some question about whether China will fully honor its agreement to buy more American exports under the trade deal.
“It is different challenges,” says Kathy Bostjancic, chief U.S. financial economist for Oxford Economics. She expects another Fed rate cut in June as economic growth this year falls short of the Fed’s 2% forecast.
Powell could have his own challenges at a 2 p.m. news conference Wednesday. Since September, the Fed has bought nearly $400 billion in Treasury bonds and other assets to pump cash into the financial system after a cash shortage briefly pushed the federal funds rate above the Fed’s target range.
Fed officials have emphasized that unlike the Fed’s massive bond purchases during and after the Great Recession of 2007-09, known as quantitative easing, the latest purchases involve short-term rather than long-term assets and so are not designed to stimulate the economy and markets by lowering long-term interest rates. But Bostjancic is among analysts who believe the initiative has prompted some investors to move money from low-yielding bonds to stocks and other riskier assets, juicing the market.
Powell could provide guidance Wednesday on how the Fed is likely to wind down the program over the next few months. That could spook some investors who fear such a tapering could hurt stocks, Bostjancic says. Powell may again take pains to distinguish the purchases from quantitative easing, or QE.
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