The second meeting of the Federal Reserve this year should serve to answer two questions that has been circling Wall Street to understand the strategy of patience. When the US central bank will raise interest rates again and what will it do with the debt assets that he accumulated in your balance to exit the crisis. Answer: according to current forecasts, there will be no further increases in 2019 and the portfolio will be reduced in September. By 2020, only one increase is expected at this time.
Inaction was what the market predicted for this new encounter. The types are thus stagnant in a band between 2.25% and 2.5%. There they are since last December. A year ago, they increased in March. The attention was directed, therefore, to the new economic forecasts and the result of the internal survey of its members looking for signs to anticipate future movements. And that was partly the surprise, because the Fed is less optimistic.
The organization headed by Jerome Powell certifies that the expansion continues although it does so at a slower pace than expected. The projection now is to grow 2.1% for the whole of 2019, two tenths less than anticipated, and to decrease to 1.9% in 2020. Last year it did 2.9%. Inflation is expected to remain close to the benchmark level of 2%, which gives it room for maneuver. In parallel, it seeks more clarity about the global economy before acting.
The Fed seems, therefore, to be comfortable where it is and is more dedicated to thinking about what it will do later on before an eventual change of cycle. The members of the central bank no longer consider as possible the increase in interest rates this year. We will have to wait until 2020. The December meeting has already lowered the expectation of three to two increases for this year. The long-term rate drops to 2.8%, which implies that the neutral would be between 2.5% and 3%.
"It's a good time to be patient," Powell repeated at the subsequent press conference, "the data does not invite you to go in one or the other direction." The situation is very different from three months ago. The tension that dominated Wall Streer dissipated and that is reflected in the S & P 500 index, which bounced almost 15% since the beginning of the year. It helped to a large extent the change of language regarding the normalization process. Powell justified it by saying that there are currents going in the opposite direction, as a slowdown greater than expected in China and Europe.
The president of the Fed also advanced in his last appearance before Congress that the central bank was preparing to adjust the process of reducing the balance. That implies two things. First, there will be a break sooner rather than later. And, second, that the assets that will continue to hold in the portfolio should determine the appropriate composition. The idea is to have a configuration similar to the one prior to the crisis.
The Fed began buying assets in 2008 to sustain growth. The scaffolding was growing until the end of 2014, when it touched 4.5 billion. Before the recession, it did not reach a trillion. This will begin to lessen the process of reducing the balance in greater so that the break occurs in September, exactly two years after starting the process. The objective is to have additional ammunition to act, because the nominal type is very low.
The data already show that the economy is moderating, although not at a rate that is considered worrying enough to lower rates. The downward trend could accelerate, however, in the second half of the year. That would lead to force a policy change later, from a neutral strategy like the current one to a more defensive one. The urgency of raising rates, therefore, does not exist and the Fed itself now sees the two increases unnecessary.
In this climate, the rate of the two-year bond moved before the decision at 2.45%. The 10-year bills were slightly below 2.6%, as in January of last year. The debt market had already bought the arrival at the end of the cycle. Nor does it give him more room for maneuver because a further increase in the price of money could lead to an investment in short and long-term interest rates. In the past, that was an indication that the recession was approaching. It's a scenario that Powell dismisses.