“The Fed underscored patience and a strong desire to allow inflation to run above target,” researchers at Bank of America Merrill Lynch said in a research note. “As Powell said in his opening remarks, the Fed’s overarching goal is to sustain the economic expansion. This unprecedented dovish turn clearly shows such commitment.”
Yields on the 10-year Treasury note — a bellwether for a range of consumer borrowing rates — dropped sharply after the Fed statement was released as investors digested the potential that the Fed could be done raising rates for some time. The yield on the 10-year Treasury fell to 2.52 percent — its lowest level since January 2018. Stocks, which had been negative for most of the day, rallied and briefly regained positive territory after the announcement. However, they lost steam in the last hour of trading, and the S&P 500 closed down 0.3 percent.
Analysts had been expecting the Fed to shift its forecasts at the meeting, but not by this much.
Eleven committee members said they do not expect any rate increases this year. Four said they expected one. None expected a rate cut. In 2020, a majority of members expected at least one rate increase, although some expected none.
Fed officials also announced that they would end an effort to slim the central bank’s massive holdings of government-backed securities in September, after slowing it down in May. The Fed accumulated $4.5 trillion worth of Treasury and mortgage-backed securities in an effort to stimulate the economy after the Great Recession. It has been slowly winnowing those holdings as the economy has recovered.
Many analysts had expected officials to announce the September end of the balance sheet wind-down, which Mr. Powell had foreshadowed in a recent speech at Stanford University. By October, the Fed said on Wednesday, officials will be shifting the composition of the balance sheet, moving out of agency debt and mortgage-backed securities and into primarily Treasury bonds.
Officials appeared to hasten to end the balance sheet reduction under pressure from financial markets. Many analysts blamed stock market volatility in December and January on the Fed’s wind-down process.
In announcing the end of the reduction, Fed officials acknowledged that they were stopping short of what many analysts had expected when the reduction began. They said the total holdings on the balance sheet once the wind-down ends “will likely still be somewhat above the level of reserves necessary to efficiently and effectively implement monetary policy.”
Carrying a larger-than-expected balance sheet — and operating with interest rates at what remain historically low levels — could hinder the Fed in battling an economic downturn in the near future.