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Fast Comment USFed leaves rates on hold; balance sheet run-down to end in September

  1. Fed leaves rates unchanged as expected and “dot plots” indicate unchanged rates in 2019
  2. Fed continues to signal a patient stance; balance sheet run-down to end in September
  3. We expect the Fed to leave rates on hold this year, with the next step to be rate cuts next year
Fed leaves rates unchanged as expected and “dot plots” indicate unchanged rates in 2019
As widely expected, the Federal Reserve maintained the target range for the federal funds rate at 2.25-2.50 percent at the FOMC meeting that concluded today. The median projection for the policy rate path (“the dot plots”) signals unchanged rates in 2019, down from two hikes in the December projection. However, the median projection still indicates one hike in 2020 (the same as in the December projection). The most important change to the economic projections was lower GDP growth, higher unemployment and lower inflation in 2019-20, and this formed part of the justification for unchanged rates this year. The general message is the committee thinks there’s no reason to hike this year, inflation pressures are absent, and growth is slowing more than expected.
Fed continues to signal a patient stance; balance sheet run-down to end in September
The FOMC remains “patient” in respect to future policy changes. In the statement, there's a downgrade in the economic assessment "activity slowed from its solid rate in the fourth quarter''. The statement also points to slower growth of household spending and business fixed investment. The Fed also said it would slow the monthly reduction of its Treasury holdings from USD 30bn to USD 15bn starting in May, and expected to “conclude” the reduction of aggregate securities at the end of September. Bond yields were lower and the dollar fell following the Fed's dovish decision.
We expect the Fed to leave rates on hold this year, with the next step to be rate cuts next year
All in all, we expect that a "patient" Fed, faced with rates close to the neutral rate, muted inflation and weaker growth, will not raise rates this year. We also think the economic slowdown, with a rebound in the unemployment rate, means the Fed will cut rates next year. In our last macroeconomic forecast in January, we expected the Fed to implement a final hike. In our next forecast in early April, we will clarify that we no longer expect a hike this year.


Disclaimer
Anders Bergvall

Anders Bergvall

Senior Economist

Thematic analysis and USA

anbe83@handelsbanken.se

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