By CentralBankNews.info

The U.S. Federal Reserve left its benchmark federal funds rate steady at 2.25 – 2.50 percent, as widely expected, but acknowledged economic activity has slowed and slashed its forecast for the rate path this year through 2021, with the rate seen on hold for the rest of this year.

The Federal Open Market Committee (FOMC), the Fed’s policy-making body, forecast the fed funds rate would average 2.4 percent this year, sharply down from December’s forecast of 2.9 percent, which had implied 2 rate hikes this year.

In 2020 the Fed expects to raise its rate once to an average of 2.6 percent, down from December’s projection of an average rate of 3.1 percent, and then maintain this rate in 2021.

After raising its rate 9 times since December 2015, the Fed shifted into a more dovish policy stance in early January following a sharp stock market sell-off in December.

In January, when the Fed also kept its rate steady, the Fed said it was ready to adjust the pace of normalization of its balance sheet if economic conditions were to warrant an easier policy.

Since October 2017 the Fed has slowly been shrinking its holdings of some $4 trillions of bonds by allowing $30 billion of Treasuries and $20 billion in mortgage bonds to mature every month.

Today, the Fed said it would slow the redemptions of Treasury bonds to $15 billion a month and then stop the runoff at the end of September.

As far as mortgage bonds, the Fed will let these bonds mature and then from October reinvest the principal payments into Treasuries up to $20 billion a month as it gradually meets its longer-term aim of primarily owning Treasury securities.

In its statement, the FOMC said the labor market remains strong but economic activity has slowed from its solid rate in the fourth quarter of 2018, with data showing slower growth in household spending and business fixed investment in the first quarter.

The U.S. economy began to slow toward the end of last year, with quarterly growth in gross domestic product down to 2.6 percent from the third quarter. On an annual basis, GDP still rose 3.1 percent in the fourth quarter, the 10th consecutive quarter of growth.

As in January, the FOMC said it “will be patient” as it decides on future rate changes in light of global economic and financial developments and muted inflation pressures.

Reflecting the impact on the U.S. economy from the slowdown in Europe and China, the Fed cut its forecast for economic growth this year to 2.1 percent from its previous expectation of 2.3 percent and the 2020 forecast to 1.9 percent from 2.0 percent.

In 2021 growth is expected to decelerate further to 1.8 percent, as forecast in December.

While economic growth still remains solid, inflation has been trending downward since mid-2018, with headline inflation of 1.5 percent in February, largely due to lower energy prices.

As in January, the FOMC was unanimous in its policy decision.

The Board of Governors of the Federal Reserve System released following 3 statements:

• To ensure a smooth transition to the longer-run level of reserves consistent with efficient and effective policy implementation, the Committee intends to slow the pace of the decline in reserves over coming quarters provided that the economy and money market conditions evolve about as expected.
  • The Committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019.
  • The Committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account (SOMA) at the end of September 2019.
  • The Committee intends to continue to allow its holdings of agency debt and agency mortgage-backed securities (MBS) to decline, consistent with the aim of holding primarily Treasury securities in the longer run.
    • Beginning in October 2019, principal payments received from agency debt and agency MBS will be reinvested in Treasury securities subject to a maximum amount of $20 billion per month; any principal payments in excess of that maximum will continue to be reinvested in agency MBS.
    • Principal payments from agency debt and agency MBS below the $20 billion maximum will initially be invested in Treasury securities across a range of maturities to roughly match the maturity composition of Treasury securities outstanding; the Committee will revisit this reinvestment plan in connection with its deliberations regarding the longer-run composition of the SOMA portfolio.
    • It continues to be the Committee’s view that limited sales of agency MBS might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public well in advance.
  • The average level of reserves after the FOMC has concluded the reduction of its aggregate securities holdings at the end of September will likely still be somewhat above the level of reserves necessary to efficiently and effectively implement monetary policy.
    • In that case, the Committee currently anticipates that it will likely hold the size of the SOMA portfolio roughly constant for a time. During such a period, persistent gradual increases in currency and other non-reserve liabilities would be accompanied by corresponding gradual declines in reserve balances to a level consistent with efficient and effective implementation of monetary policy.
  • When the Committee judges that reserve balances have declined to this level, the SOMA portfolio will hold no more securities than necessary for efficient and effective policy implementation. Once that point is reached, the Committee will begin increasing its securities holdings to keep pace with trend growth of the Federal Reserve’s non-reserve liabilities and maintain an appropriate level of reserves in the system.”

• The Board of Governors of the Federal Reserve System voted unanimously to maintain the interest rate paid on required and excess reserve balances at 2.40 percent, effective March 21, 2019.
• As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:
  

  “Effective March 21, 2019, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 2-1/4 to 2-1/2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 2.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per‑counterparty limit of $30 billion per day.

  The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $30 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.

  The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”

• In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 3.00 percent.