The Federal Reserve held interest rates steady and its policymakers abandoned projections for further rate hikes this year as the US central bank flagged an expected slowdown in the economy.
In a major shift in its perspective, the Fed also now expects to raise borrowing costs only once more through 2021, and no longer anticipates the need to guard against inflation with restrictive monetary policy.
After a two-day policy meeting that sealed the switch to a less aggressive posture, the Fed also said it would slow the monthly reduction of its holdings of Treasury bonds from up to$30 billion to up to $15 billion beginning in May.
It said it would end its balance sheet run off in September provided the economy and money market conditions evolved as expected. Redemptions of mortgage-backed securities would at that point be reinvested in Treasuries up to as much as $20 billion per month, moving the Fed generally towards a Treasuries-only approach to its assets.
The combined announcements mean that, after tightening monetary policy with two levers at once over the past year, the Fed is now pausing on both fronts to adjust to weaker global growth and a somewhat weaker outlook for the US economy.
Updated quarterly economic projections released by the Fed showed weakening on all fronts compared to the forecasts from December, with unemployment expected to be slightly higher this year, inflation edging down, and economic growth lower as well.
"Growth of economic activity has slowed from its solid rate in the fourth quarter," the Fed said in a policy statement that kept its benchmark overnight lending rate, or federal funds rate, in a range of 2.25% to 2.5%.
"Recent indicators point to slower growth of household spending and business fixed investment in the first quarter ...overall inflation has declined."
Fed policymakers project gross domestic product growth to slow to 2.1% this year from the previous forecast of 2.3%, while the unemployment rate is forecast at 3.7%, slightly higher than the December projection.
Inflation for the year is now seen at 1.8%, compared to the Fed's forecast in December of 1.9%.
The new projections amounted to a wholesale downgrade of the Fed's outlook, with at least nine of its 17 policymakers lowering their expected rate path and collectively shaving a full half of a percentage point off the expected fed funds rate at the end of this year.
The move put the Fed in sync with financial markets'current expectations that the tightening cycle was all but finished. Some investors expect the next move to be a rate cut.
As it stands, the Fed, which raised rates seven times over the 2017-2018 period, is approaching a stopping point of 2.6% for its fed funds rate, which would leave it well below historic norms.
"With the Fed now guiding unchanged rates through 2019, equity markets should continue their recent good run," said Pat Byrne, Head of Money Markets at Bank of Ireland.
"One area to watch will be to what extent the interest rate market starts to second guess the next interest rate cycle."
"At the moment, markets are pricing a modestly lower interest rate path in the years ahead – any acceleration of this market path would be unwelcome for the Fed as it would feed the narrative around slower global growth."
"The Dollar immediately fell against the Euro, with Euro/Dollar reaching its highest levels since the start of the year."
"From here currency markets will be focused on European data later in the week where any pick up from the current low readings could give the single currency a further boost."