Federal Reserve keeps interest rates on hold, signals end of rate rises

The US Federal Reserve has halted interest rate rises and has promised to be ‘‘patient’’ about future rises in a decision that immediately boosted the US stock market.

That decision – plus a promise to back off on reducing its bond holdings – immediately saw the Dow Jones Industrial Average jump 200 points on top of a 260 point rally before the decision, showing that investors are embracing the Fed’s dovish turn.

However, the US dollar weakened as currency markets digested the news that US interest rates could now stay lower than expected for a significant time.

Rate rises could be nearing an end

US Federal Reserve chairman Jerome Powell signalled that interest rates could remain steady for several months due to economic pressures and mild inflation, in a decision that was backed by a 10-0 vote.

In its statement, the Fed said, “In light of global economic and financial developments and muted inflation pressures, the committee will be patient in determining what future adjustments” to the Fed’s interest-rate policy will be appropriate.

It also changed the wording of its opinion of the US economy, which was downgraded from “strong” to “solid.”

Analysts quickly interpreted “patience’’ as a strong signal that the Fed’s program of four interest rate rises last year and nine rate rises in the past three years was getting close to ending and that it would slow the reduction of its bond holdings if needed to help the economy.

Bond sales to slow

Benchmark US short-term rates will now remain in a range of 2.25% to 2.5%, which in turn will influence many loan rates for businesses and consumers, including mortgages.

The Fed’s gradual reduction of its bond portfolio which was built up massively in the wake of the GFC has also been contributing to higher borrowing rates.

It now looks likely that the Fed will slow that process of bond sales or end it sooner than anticipated in a bid to support the US economy.

In its decision the central bank said it was ready to use all its tools — including an adjustment to its bond portfolio — if it decided the economy needed more support.

Shutdown had an impact

The Fed change of heart has been more difficult to arrive at than usual due to the US Government shutdown which has held up the production of key statistics by the Commerce and Treasury departments.

That includes data on retail sales, home construction and factory orders, which will now begin trickling out later this week.

The shutdown itself is also likely to slow the US economy.

The Fed balancing act is difficult because despite signs of global economic weakness, particularly in China, the US numbers on the job market have stayed quite strong and company profits have also been stronger than predicted.

The Fed’s dovish turn has reduced concerns that higher borrowing costs might depress corporate earnings and economic growth and has also sparked a remarkable comeback on the stock market which has rallied hard this year after falling sharply in late 2018.

January is now looking like the best month for the US stock market since March 2016.