The Federal Reserve left interest rates unchanged at its final meeting of the year on Wednesday, and officials signaled an indefinite pause as America’s economy chugs through a record-long expansion on what appears to be sustainable footing.
Officials penciled in no rate changes next year, according to their latest set of quarterly economic projections, and saw only one move, an increase, in 2021, followed by a second in 2022.
Even those moves seemed uncertain: Jerome H. Powell, the Fed chair, said at a postmeeting news conference that he thought the Fed’s policy rate would remain appropriate until inflation rose persistently, and pointed out that “none of us have much of a sense of what the economy will look like in 2021.”
The Fed’s wait-and-see outlook underscores the level of comfort that Mr. Powell and his colleagues have with the state of the economy after they cut interest rates three times between July and late October. Those moves were meant to guard the economy against the fallout of President Trump’s prolonged trade war and slowing growth abroad.
On Wednesday, Mr. Powell suggested that the adjustments were having their intended effect.
“Our economic outlook remains a favorable one,” he said. The Fed chair noted that the economic expansion is in its 11th year — the longest on record — and that many Americans who want jobs are finding them.
While many analysts were on recession-watch just six months ago, the Fed has become more optimistic about the economic outlook as the job market holds up and consumers continue spending. In their postmeeting statement, officials dropped their previous caveat that “uncertainties” about the outlook remained, a sign of their increasing confidence.
“With a strong household sector and supportive monetary and financial conditions, we expect moderate growth to continue,” Mr. Powell said.
Risks to the outlook remain. Factory data remains weak, a fact Mr. Powell attributed in part to “sluggish” growth abroad.
Mr. Trump’s trade war with China has also put a chill on business investment as companies wait to see whether the world’s largest economies can resolve their differences. The Fed chair said businesses had “been telling us for a year and a half that trade policy uncertainty is weighing on the outlook.”
What happens next on tariffs is a critical wild card for the central bank. While tensions have shown recent signs of easing, how they will end is anyone’s guess. Barring a last-minute delay, another round of tariffs on $160 billion worth of Chinese goods is to go into effect on Sunday, at which point the United States will have imposed levies on nearly every shoe, laptop and bicycle imported from China.
But for now, growth looks solid — and sustainable.
All 17 Fed officials were comfortable leaving rates unchanged this month, and only four see higher rates in 2020, based on the economic projections, down from nine when the Fed released its last set of quarterly projections in September.
While the Fed is usually more eager to raise interest rates when unemployment is very low, that view has evolved dramatically over the course of the expansion.
Lawmakers have given the central bank two goals: achieving and maintaining stable inflation and maximum employment. Fed officials adjust interest rates to either speed or slow the economy in a quest to accomplish those targets.
They have historically seen the twin tasks as a sort of trade-off. Low unemployment is usually expected to spur faster wages, which then feed into higher prices.
But joblessness has been hovering near a 50-year low for the past year and a half, and wages are climbing only moderately while upward pressures on prices are soft.
“I like to say that the labor market is strong; I don’t really want to say that it’s tight,” Mr. Powell said. “To call it hot, you’d want to see heat. You’d want to see higher wages.”
That gives the central bank room to leave interest rates very low by historical standards — they are at 1.5 to 1.75 percent, down from about 5.25 percent before the last recession — without worrying that inflation will shoot past its 2 percent goal.
“This is a good thing: We’ve learned that unemployment can remain at quite low levels for an extended period of time without unwanted upward pressure on inflation,” Mr. Powell said. “In fact, we need some upward pressure on inflation to get back to 2 percent.”
Mr. Trump, for his part, has been pressuring the Fed to slash interest rates more aggressively. He has even urged Mr. Powell and his colleagues to cut borrowing costs below zero, as European and Japanese central banks have done. But the central bank — which operates independently of the White House and answers to Congress — appears disinclined to comply.
Officials say that they change rates only for clear economic reasons. Slashing them arbitrarily would destroy the Fed’s independence and leave the central bank with even less room to cut borrowing costs, which are already uncomfortably close to rock bottom, in the next economic downturn.
Policymakers have also made it clear that they do not think negative rates would work well in America, and that they would not be appropriate given the nation’s strong economy.
If past is predicate, those explanations will not prevent Mr. Trump from blaming the central bank for any economic problems as the country heads toward the 2020 election. He has made a regular habit of bashing central bankers on Twitter and in public remarks.
For now, Fed officials are turning their attention to more imminent concerns. They are closely watching the market for repurchase agreements — an obscure but critical corner of the financial world — as the end of the year approaches.
So-called repo rates jumped out of control in mid-September, as a due date for corporate taxes and a large issuance of Treasury securities helped to fuel a cash shortage in a market that hedge funds and banks use for short-term loans. The messiness spilled over into other money markets, and temporarily pushed the federal funds rate above its target range.
The Fed has been supplying liquidity to the market ever since, and in October it began to swell its security holdings again in an effort to make sure that reserves — cash deposits at the Fed — are sufficiently ample.
But another potential hiccup awaits. Repo rates jumped at the end of 2018, as banks hoarded their reserve holdings to make their balance sheets look better for regulatory reasons. Many investors are bracing for a 2019 repeat.
“We think that the pressures appear manageable, and we stand ready to adjust the details of our operations as necessary to keep the federal funds rate in the target range,” Mr. Powell said. In the longer term, he added, the Fed is “open to ideas for modifying supervisory and regulatory practices in ways that don’t undermine safety and soundness.”
