The Economy

Fed Shifts to ‘Patient’ Policy on Rate Hikes

The central bank indicated it will slow the pace of interest rate increases in response to changing economic conditions.
Matthew HellerJanuary 31, 2019
Fed Shifts to ‘Patient’ Policy on Rate Hikes

The U.S. Federal Reserve signaled on Wednesday that it will slow the pace of interest-rate hikes, calling for a “patient” approach amid macroeconomic “cross-currents” and diminished inflation risks.

After a two-day meeting of its policy-making committee, the Fed decided, as expected, to keep the benchmark federal funds rate within the target range of 2.25% to 2.50% percent that it set in December.

Fed officials had predicted at least two rate increases in 2019 as the central bank continued on its course of “gradual” hikes. But the word “gradual” was omitted from Wednesday’s post-meeting statement.

“In light of global economic and financial developments and muted inflation pressures, the [policy-making] committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support” the Fed’s objectives, the statement said.

In comments to the media, Fed chairman Jerome Powell said such an approach was the appropriate response to changing economic conditions.

“Over the past few months we have seen some cross-currents and conflicting signals,” he said, citing slowing growth in China and Europe, ongoing trade negotiations, the partial government shutdown in the U.S., and the tightening of financial conditions in late 2018.

Powell also noted that “Inflation readings have been muted, and the recent drop in oil prices is likely to push headline inflation lower still in coming months.”

“In this environment, we believe we can best support the economy by being patient in evaluating the outlook before making any future adjustment to policy,” he said.

Fed officials forecast in December that economic growth would decline to 2.3% this year from 3% in 2018.

“It does feel like the top of the [rate-hiking] cycle,” Tim Duy, an economist at the University of Oregon, told The New York Times. “With the economy poised to slow over the next year, the Fed is not interested in risking turning that slowdown into a recession.”

But Brian Coulton, chief economist at Fitch Ratings, said the Fed’s statement “reads more like a pause than a strong signal that they believe that they are at the end of the hiking cycle.”