Fed Signals It May Not Change Interest Rates This Year

A trader works on the floor at the New York Stock Exchangein New York

It now predicts an even more disappointing only 1.9 percent growth in 2020.

While the central bank is very close to its twin goals of low and stable inflation and full employment, Chairman Jerome Powell and his colleagues must contend with risks from overseas, including slowing growth in Europe and China and possible spillovers from Britain's exit from the European Union.

Also in December, Fed officials had indicated there would be two 0.25-percentage-point hikes this year in the short-term federal funds rate, a benchmark for credit cards, auto loans and other short-term consumer lending. Some analysts believe the next rate move could be a cut later this year if the economy slows as much as some fear it might.

That more pessimistic outlook is likely the main reason that the Fed forecast zero interest rate hikes this year, a sharp change in their outlook from just three months ago when they projected two hikes.

USA manufacturing output fell for a second straight month in February and factory activity in NY state hit almost a two-year low this month, offering further evidence of a sharp slowdown in economic growth early in the first quarter.

Oil prices were firm, supported by supply cuts led by producer club OPEC as well as US sanctions against Iran and Venezuela, though gains were limited by concerns over global economic growth.

Economic growth "has slowed from its solid rate in the fourth quarter", the FOMC said in its statement.

In recent months, Powell and the Fed have appeared to take a more dovish approach to interest rates amid concerns about slowing global growth - a result of a more than year-long trade war between the US and China and uncertainties about Brexit.

That could become more apparent Wednesday afternoon, when the Federal Reserve is widely expected to hold interest rates steady.

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The Dow Jones Industrial Average rose 56.75 points, or 0.22 percent, to 25,970.85, the S&P 500 gained 8.19 points, or 0.29 percent, to 2,841.13 and the Nasdaq Composite added 34.95 points, or 0.45 percent, to 7,749.43.

The Euro STOXX 600 fell 0.3 per cent, with indexes in Britain and France also slightly down as investors closed positions before the Fed's decision, due at 1800 GMT. Bonds rallied, too, driving yields sharply lower in the wake of the Fed's unexpected capituation.

The yield on the 10-year Treasury note dropped to 2.53 per cent.

Stock markets are subdued ahead of a monetary policy statement by the U.S. Federal Reserve in which the central bank is expected to say it will be patient about raising interest rates further.

The Japanese yen strengthened 0.03 percent versus the greenback at 111.40 per dollar.

As it stands, the Fed, which raised rates seven times over the 2017-2018 period, is approaching a stopping point of 2.6 percent for its fed funds rate, which would leave it well below historic norms. Most analysts think the policymakers will scale back their projection of rate hikes this year from two to one or perhaps even none.

The Fed is set to keep its key short-term rate in a range of 2.25 percent to 2.5 percent, still low by historical standards. "The fact that the Fed threw in the towel on a 2019 rate hike was particularly dovish".

The central bank's new embrace of patience and flexibility reflects its calming response since the start of the year to slow growth at home and overseas, a nervous stock market and persistently mild inflation.

Cementing a rapid shift in perspective in recent months, the Fed also now expects to raise borrowing costs only once more through 2021, and no longer anticipates the need to guard against inflation with restrictive monetary policy.

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