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.
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.
As in January, the FOMC was unanimous in its policy decision.
The Board of Governors of the Federal Reserve System released following 3 statements:
“Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.”
Balance Sheet Normalization Principles and Plans
“In light of its discussions at previous meetings and the progress in normalizing the size of the Federal Reserve’s securities holdings and the level of reserves in the banking system, all participants agreed that it is appropriate at this time for the Committee to provide additional information regarding its plans for the size of its securities holdings and the transition to the longer-run operating regime. At its January meeting, the Committee stated that it intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve’s administered rates and in which active management of the supply of reserves is not required. The Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization released in January as well as the principles and plans listed below together revise and replace the Committee’s earlier Policy Normalization Principles and Plans.
- To ensure a smooth transition to the longer-run level of reserves consistent with efficient and effective policy implementation, the Committee intends to slow the pace of the decline in reserves over coming quarters provided that the economy and money market conditions evolve about as expected.
- The Committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019.
- The Committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account (SOMA) at the end of September 2019.
- The Committee intends to continue to allow its holdings of agency debt and agency mortgage-backed securities (MBS) to decline, consistent with the aim of holding primarily Treasury securities in the longer run.
- Beginning in October 2019, principal payments received from agency debt and agency MBS will be reinvested in Treasury securities subject to a maximum amount of $20 billion per month; any principal payments in excess of that maximum will continue to be reinvested in agency MBS.
- Principal payments from agency debt and agency MBS below the $20 billion maximum will initially be invested in Treasury securities across a range of maturities to roughly match the maturity composition of Treasury securities outstanding; the Committee will revisit this reinvestment plan in connection with its deliberations regarding the longer-run composition of the SOMA portfolio.
- It continues to be the Committee’s view that limited sales of agency MBS might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public well in advance.
- The average level of reserves after the FOMC has concluded the reduction of its aggregate securities holdings at the end of September will likely still be somewhat above the level of reserves necessary to efficiently and effectively implement monetary policy.
- In that case, the Committee currently anticipates that it will likely hold the size of the SOMA portfolio roughly constant for a time. During such a period, persistent gradual increases in currency and other non-reserve liabilities would be accompanied by corresponding gradual declines in reserve balances to a level consistent with efficient and effective implementation of monetary policy.
- When the Committee judges that reserve balances have declined to this level, the SOMA portfolio will hold no more securities than necessary for efficient and effective policy implementation. Once that point is reached, the Committee will begin increasing its securities holdings to keep pace with trend growth of the Federal Reserve’s non-reserve liabilities and maintain an appropriate level of reserves in the system.”
Decisions Regarding Monetary Policy Implementation
“The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on March 20, 2019:
- The Board of Governors of the Federal Reserve System voted unanimously to maintain the interest rate paid on required and excess reserve balances at 2.40 percent, effective March 21, 2019.
- As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:
“Effective March 21, 2019, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 2-1/4 to 2-1/2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 2.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per‑counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $30 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”
- In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 3.00 percent.
This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve’s operational tools and approach used to implement monetary policy.
More information regarding open market operations and reinvestments may be found on the Federal Reserve Bank of New York’s website.”