To the confusion roiling global equity markets daily comes another unexpected surprise -- a stunning U.S. Federal Reserve announcement it won't hike interest rates this year and will only do one hike in 2020.
Th Fed said it doesn't expect to raise interest rates for the rest of 2019 amid slower economic growth. It voted unanimously to keep the interest rate range between 2.25% to 2.5% while warning that "growth of economic activity has slowed from its solid rate in the fourth quarter."
Mortgage rates fell quickly after the Fed's announcement it will resume bond-buying and in a big way, which will take rates even lower. Good news for mortgage holders and credit card holders. But skeptics say the Fed's decision seems to indicate all isn't well with the apparently still robust U.S. economy despite the slowdown among its major trading partners.
The Fed also said it will stop allowing $50 billion of Treasurys and mortgage-backed securities to roll off its balance sheet each month starting September. Its move to end the runoff of bonds from its balance sheet earlier than expected caused yield on 10-year Treasury to tumble. Mortgage rates loosely follow that yield.
"This is about as big of a change as anyone expected. It means the Fed will be buying more bonds more quickly," wrote Matthew Graham, chief operating officer of Mortgage News Daily. "And bond buying results in lower rates, all other things being equal."
Fed chairman Jerome Powell maintained his position the central bank will continue to be "patient." He also said, "It may be some time before the outlook for jobs and inflation calls clearly for a change in policy."
The doubters describe the Fed's decision to hint at a single interest-rate hike in 2020 as "bizarre." "Investors should take the Fed's decision with some pinch of salt" because it will only take a couple of strong economic readings "before we see the pressure building up again on the Fed," said Naeem Aslam, the chief market analyst at TF Global Markets..
Other analysts noted that whilethe Fed keeps insisting the economy is fine, its actions paint a distinctly less rosy picture. Fears stoked by limping global economies, Trump's unresolved trade war with China and the unending self-inflicted wound called Brexit might still force the Fed to reconsider its decision holding rate hikes in abeyance.
Fed Chairman Jerome Powell said it might be "some time" before unemployment and inflation prompted a change in policy. The central bank cut its growth forecast for this year to 2.1% from 2.3%. The U.S. economy grew 2.9% in 2018.
U.S. economic growth remains imperiled by Trump's trade war with China. Trump yesterday said the U.S.-China trade war might not come to a swift conclusion. He said tariffs on Chinese goods might remain in place for a "substantial period of time," as his administration wants concrete evidence China will hold up its end of the bargain, which is unlikely.
"What will be concerning investors behind their trading desks is...a coordinated downbeat view that is being presented by central banks and senior officials across the globe this year," said Jameel Ahmad, the global head of currency strategy and market research at FXTM.
He said the Fed has certainly joined this party by issuing its own need for 'patience' and that global headwinds remain a threat that needs to be closely watched.
