US Fed now expects no rate hikes in 2019

Traders work on the floor of the New York Stock Exchange after the opening bell in New York US. Lucas Jackson Reuters

Traders work on the floor of the New York Stock Exchange after the opening bell in New York US. Lucas Jackson Reuters

The U.S. Federal Reserve announced to leave interest rates unchanged after concluding a two-day policy meeting Wednesday afternoon.

As a result, the USA dollar may face a more bearish fate over the near-term as the Fed responds to the weakening outlook for growth, with EUR/USD at risk of extending the rebound following the European Central Bank (ECB) meeting as the exchange rate clears the monthly opening range and breaks out of the downward trend from earlier this year.

The Fed took note of February's very low jobs numbers but remained upbeat about labor markets.

The committee members forecast a median federal funds rate this year of 2.4 percent - the current level - down from the 2.9 percent forecast in December, and 3.1 percent in September. And overall inflation has declined, thanks largely due to lower energy prices.

Since the start of the year, the Fed has kept rates, which influence the cost of mortgages, credit cards and other borrowing, at a range of 2.25% to 2.5%. This means that the Fed's benchmark rate will likely stay between 2.25 and 2.5 percent for the rest of the year. Immediately after the announcement, stocks surged, more than erasing earlier losses, and the yield on the 10-year bond fell to 2.53 percent.

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"The markets believe that with the Fed on hold the economy will start to show improvement", said Carin Pai, executive vice president at Fiduciary Trust Company International, based in NY. At least nine of the Fed's 17 policymakers reduced their outlook for the fed funds rate, a comparatively large number.

The unemployment rate forecast was increased to 3.7 per cent for 2019 up from 3.5 per cent in December.

The reaction of financial asset prices reflected the view that the Fed gave markets the policy guidance that the most optimistic bulls had hoped for, but few believed that the central bank would deliver so quickly.

Wednesday's indication that the Fed may not touch overnight interest rates through all of 2019 triggered one of the biggest slides for Treasury yields in months.

"Back in Q4 they weren't even talking about developments outside the US and that came up two or three times in the first 10 minutes of (Fed Chair Jerome Powell's) commentary".

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"All of this coming after only a few months of slower readings and what the Fed still sees as a solid labor market, but with concerns over global developments", says Avery Shenfeld, chief economist at CIBC Capital Markets. The Fed emphasized that recent indicators point to slower growth for household spending and business fixed investment, but otherwise the language was essentially the same.

Growth in Europe and China has weakened and there are conflicting signs about how the US economy is doing.

There is also a striking contrast between the growth that Feds policymakers think the United States can sustain - about 2% - and what President Trump's administration believes is achievable, which is more like 3%. At that meeting, the Fed approved a fourth rate hike for 2018 and projected two additional rate increases in 2019.

The Fed's policy of shrinking its balance sheet has not been blameless either, because that too has hoovered Dollars up from the worldwide financial system, leading to a scarcity that has helped support the greenback's value.

The FOMC also chose to slow the shrinking of its securities holdings - including Treasury notes and mortgage-backed securities - which were built up to $4.5 trillion in the years after the 2008 global financial crisis.

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