Trump EXCLUSIVE: US economic growth hindered by Fed rate hikes

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The Fed's surprising change of direction follows the four rate increases previous year, frequently in the face of vociferous antagonism from President Donald Trump, who called the central bank "crazy" for tightening monetary policy as the economy grew. In December, the Fed projected two rate hikes in 2019.

Interest rates are now at a range of 2.25 percent to 2.5 percent, the highest level in a decade, but still low by historical standards. Additionally, the central bank also expects the USA economy to expand at 2.1 percent this year, below its previous projections.

Starting in May, the Fed will reduce the balance sheet by $45 billion a month, down from $50 billion previously. A majority of members now anticipate just one more interest rate rise in this cycle, which is penciled in for some time in 2020. At least nine of the Fed's 17 policymakers reduced their outlook for the fed funds rate, a comparatively large number. "Growth is slowing more than expected", and "financial conditions remain less supportive of growth than in 2018", Fed Chair Jerome Powell told a press conference after a meeting of the Federal Open Market Committee.

"Everyone said we wouldn't get 3.1 percent", Hassett said.

If anything, the Fed's concern has shifted in the other direction, toward inflation remaining so low it undermines business and household expectations about the future, another potential drag on growth if either sector becomes more cautious in spending. They've also acted as a headwind for economic growth and seen the value of shares automatically marked down.

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It now plans one rate rise next year with the benchmark rate predicted to increase to 2.6 per cent in 2020.

"The fact that they've announced balance sheet runoff ending I think is certainly quite dovish as well", said Gennadiy Goldberg, interest rate strategist at TD Securities in NY.

The outlook is now also in line with President Donald Trump's criticism of Fed rate hikes as endangering the recovery, though for the awkward reason that Fed officials do not see his policies having a lasting impact on growth.

In January, the Fed pivoted after hiking rates four times in 2018, pledging patience before making further moves.

Federal Reserve policymakers see a USA economy that is rapidly losing momentum.

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The Fed also said that is will slow the monthly reduction of US Treasury bonds it holds from $30bn to $15bn from May onwards ending in September.

The dovish Fed triggered a steep plunge in U.S. Treasury yields, helping to make the U.S. Dollar a less-attractive investment while increasing demand for dollar-denominated gold. The dollar weakened broadly against major trading partners' currencies.

"That was more dovish than people were expecting at the margin, even though the market was looking for a dovish Fed today", said Tomes.

Markets expect the Fed to strike a dovish tone when it meets this week, and bets on an interest rate cut have increased after weaker-than-expected manufacturing data on Friday.

"There's one hike projected for 2020 but there's a long time between now and then and so the market is effectively taking the view that the Fed is done tightening", said Evan Brown, head of macro asset allocation strategy at UBS Asset Management. The real action centred in the bond market, where prices rose sharply, pulling Treasury yields down to the lowest levels they've seen in more than a year.

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A weaker global environment could be one of the factors warranting the more dovish Fed policy stance, even though the central bank has historically been hesitant to acknowledge policy sensitivity to economic slowdowns outside the USA, and Powell said he doesn't see Europe falling into a recession this year.

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