The Federal Reserve (Fed) held the target range for the U.S. federal funds at 2.25%-2.50% at its meeting on Wednesday. This outcome was in line with market expectations. In addition, the Fed indicated they do not expect to hike rates again in 2019 and only expect one hike in 2020.
The statement released by the Fed indicates the labour market remains strong, but economic activity has slowed from the fourth quarter. They also see signs that household spending and business investment are slowing. Inflation is described as declining due to energy prices, as core inflation remains near 2.00%.
The Summary of Economic projections released after the meeting showed downgrades in the Fed expectations for future growth and inflation with real gross domestic product (GDP) growth declining from 2.3% to 2.1% in 2019 and personal consumption expenditures (PCE) inflation declining from 1.9% to 1.8%. Longer run growth and PCE inflation expectations remain unchanged at 1.9% and 2.0%, respectively.
The Fed also announced several changes to its balance sheet. The Committee will end balance sheet runoff at the end of September, while the runoff in Treasuries will begin to decline in May, giving more support to Treasury rates. Beginning in October, principal payments received from agency debt and mortgage-backed securities will be reinvested in Treasuries subject to a US$20 billion cap, which is about as expected.
Overall this is a very dovish statement from the Fed. Fewer interest rate hikes and a Federal Reserve balance sheet that begins growing again in the future should mean lower yields in general and potentially easier financial conditions. That should be a positive for a broad spectrum of assets including fixed income and housing. It should also be an overall negative for the U.S. dollar.