Fed leaves rates at current level; economy on track, growth likely to persist, Powell says

After the Federal Reserve Board voted unanimously Wednesday to leave interest rates unchanged, Fed Chairman Jerome Powell said the Fed’s actions have “kept the economy on track.” More photos are available at arkansasonline.com/1212powell/.
(AP/Jacquelyn Martin)
After the Federal Reserve Board voted unanimously Wednesday to leave interest rates unchanged, Fed Chairman Jerome Powell said the Fed’s actions have “kept the economy on track.” More photos are available at arkansasonline.com/1212powell/. (AP/Jacquelyn Martin)

WASHINGTON -- The Federal Reserve hit the pause button Wednesday, deciding to leave interest rates unchanged for now and signaling no plans to cut them in 2020. President Donald Trump has repeatedly urged the Fed to slash rates, but the central bank says the U.S. economy is in a good place and does not need an extra boost.

On Wednesday, the Fed left its key short-term rate in a low range of 1.5% to 1.75%, down from nearly 2.5% a year ago. Fed Chairman Jerome Powell had previously characterized those rate cuts as "insurance" that would offset the drags from the U.S.-China trade war and global slowdown.

The Fed lowered the interest rate in July, September and October in a bid to calm recession fears on Wall Street and counter the negative effects of the trade war.

For months, the Fed has stressed there were many "head winds" and "uncertainties" about the economic outlook, but there is no longer any mention of that in the official statement, an indication that the central bank thinks the economy is stronger now than it was over the summer.

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A lower interest rate makes it cheaper to borrow money to buy a home and car or to start a business. It also means savers get less in monthly interest on the money they keep in savings accounts at banks. Many retirees have complained that the Fed is hurting them by keeping rates down, but Powell has said his top goal is ensuring that the recovery, which is now in its 11th year, keeps going.

"We expect moderate growth to continue," Powell said in a news conference Wednesday. "We reduced [interest rates] by three-quarters of a percentage point. This shift has helped support the economy and has kept the economy on track."

For now, the chairman has managed to draw his colleagues on the Fed's policy-making committee fully into his corner. No Fed officials dissented from Wednesday's decision to keep rates unchanged -- the first time in five meetings that a vote was unanimous.

"If I were Powell, I would say I have things exactly where I want them," said David Jones, an economist and author of five books on the Fed. "Despite all the people who criticized Powell for not easing sooner or not easing more, it looks like this mid-course correction of three rate cuts was almost perfect in keeping the economy growing on a sustained basis."

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"The big news was that the vote was unanimous for the first time in five meetings. This signals a higher level of comfort with the state of the economy," said Tendayi Kapfidze, chief economist at LendingTree.

Fed leaders predict that the economy will grow 2% next year, a downgrade from 2.2% growth this year and 2.9% in 2018.

"Do-nothing Congress, and now do-nothing Federal Reserve," said Chris Rupkey, chief financial economist at MUFG Bank. "Looks like policy is stuck in neutral here at 1.75% without a recession or inflation, neither of which are very likely anytime soon."

Trump has blasted the Fed, saying it is keeping interest rates too high and calling central bank officials "boneheads." He has urged them to cut rates to zero, effectively allowing people and businesses to borrow money interest-free. But Wall Street investors and most economists think the Fed will stay on hold for months to come. Investors are penciling in one more rate cut before the election, probably in July or September.

Powell left the door open to changing interest rates in 2020, but he stressed there is a high bar for moving rates up or down.

"We're going to do what we think is the right thing for the economy," Powell said. If there is a "material reassessment of our outlook, we would respond accordingly."

Economists say the Fed's actions kept the economy on track despite head winds.

Recession fears peaked in August when the "yield curve" inverted -- a warning sign that typically occurs a year or two before a recession takes hold. But the yield curve has returned to normal, and the chance of recession has fallen from about 50% in August to below 25% now, according to most analysts.

The upshot is that the Fed is taking a long pause unless something comes along to change its mind.

Risks do exist, and Fed officials did not suggest everything was rosy. The outlook for manufacturing "has declined," Powell said, attributing that to "sluggish growth abroad and trade developments."

But stocks are now back at record highs. Unemployment is at a half-century low, inflation remains tame and the economy continues to grow at a healthy pace around 2%, with little chance of a recession. Wall Street is also hopeful that Trump will not enact any more tariffs.

As the economic outlook has improved for 2020, Trump has lessened his attacks on the Fed. He tweeted (or retweeted) 43 times about the Fed ahead of the central bank's September meeting. He reduced that to five times ahead of the Fed's October meeting and nine times ahead of Wednesday's meeting.

Powell's satisfaction with the Fed's policies comes after the central bank executed a U-turn this year. The Fed raised its benchmark short-term rate four times in 2018 after growth began the year at a healthy pace. But as the trade conflicts intensified, the stock market fell at year's end and inflation slowed rather than picked up as expected, the Fed reversed course and cut rates three times.

"Toward the end of 2018, there was still a sense that the economy was growing at around 3%, and it didn't," he said. "I didn't expect to face the challenges, but I think we did face them, and I'm pleased that we moved to support the economy in the way that we did."

Fed policymakers have been weighing their options to stabilize short-term lending in money markets. In late September, overnight lending markets seized up, and banks and other financial institutions struggled to find short-term loans. This problem briefly lifted the Fed's benchmark rate out of its target range.

Powell said the Fed's efforts to boost banks' cash reserves by purchasing Treasury bills and its own short-term lending have been effective.

"For the last couple of months, [short-term lending] markets have been functioning well," he said.

In the longer run, Powell said the Fed is considering "fairly straightforward, noncontroversial changes" to financial regulations to make it easier for large banks to provide short-term loans.

The Fed's policy-setting committee will hold its next meeting Jan. 28-29, less than a week before the Iowa caucuses begin the primary process to select the Democratic presidential nominee.

Sen. Bernie Sanders, I-Vt., is the only candidate seeking the Democratic nomination who agrees with Trump that interest rates are too high. Most Democrats do not think it is appropriate for the president to weigh in on monetary policy, which is supposed to be independent of politics.

Information for this article was contributed by Heather Long of The Washington Post; by Christopher Rugaber and Martin Crutsinger of The Associated Press; and by Jeanna Smialek of The New York Times.

A Section on 12/12/2019

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