The Federal Open Market Committee (FOMC) concluded its meeting at 2 PM ET today and announced that the Federal Reserve would not raise fed fund rates. The revised dot plot—which records individual committee members’ projections for where interest rates will be at year-end—indicated that the Fed will pause any further rate hikes until 2020.
Nine members moved their dots to predict zero hikes in 2019, joining two members who already shared that dovish view.
The decision to pause rate increases comes amid a significant downward revision to gross domestic product (GDP) growth projections: the Fed said it now expects the U.S. economy to grow at a rate of 2.1 percent this year, lower than the 2.3 percent it had projected at the December meeting.
Inflation, the FOMC’s minutes said, should come in at just 1.8 percent this year and 1.9 percent next year, below the Fed’s ‘symmetric’ inflation target of 2 percent.
Homebuilders and automakers—companies whose goods are typically financed by consumers—will be cheered by the news, as lower interest rates will stimulate borrowing.
“The economy is in a good place,” Chairman Powell said, “economic fundamentals remain strong and our outlook is positive.” But Powell went on to note that more recent data, limited by the effects of the federal government shutdown, were somewhat mixed. Business fixed investment appears to be growing at a slower pace, Powell noted, and inflation has been muted.
“The federal funds rate is now within broad estimates of ‘neutral’,” Chairman Powell said, explaining that a neutral rate is neither stimulative nor restrictive of growth. Powell also said that the Federal Reserve would slow its balance sheet runoff in the middle of this year and cease it altogether in the fall. The Federal Reserve had been letting Treasuries it owned mature without reinvesting interest payments in new bonds, gradually reducing the amount of government debt it held.
Equity and debt markets rallied on the news. The S&P 500 veered into positive territory for the day, while U.S. Treasury 10 year yields fell to 2.53 percent and yields on 6 month Treasury bills dropped to 2.49 percent.
Every time Chairman Powell used the word ‘patience’ he seemed to deliberately emphasize it, and he further explained that it “may be some time before the outlook in jobs and inflation calls clearly for a change in policy.”
For the freight economy, the outcome of this meeting is decidedly mixed. On the one hand, looser monetary policy encourages consumer spending and business investment, which drives freight demand. On the other hand, the Fed canceled any 2019 rate hikes precisely because of concerns about the economy and prospects for growth.
“If you start with the notion that the economy is already decelerating, easier monetary policy is better for growth than the alternative,” said Ibrahiim Bayaan, FreightWaves Chief Economist.