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Federal Reserve cuts growth forecast for U.S. economy

  • The Federal Reserve kept a key interest rate unchanged on Wednesday and said it doesn't expect to hike rates for the rest of the year
  • It's a big change from December, when the Fed expected two rate hikes
  • Fed chairman Jerome Powell said he expects a "slowdown" but not a recession
  • The Fed expects the U.S. economy to expand at 2.1 percent this year, below its previous projections

The Federal Reserve is leaving its key interest rate unchanged and projecting no rate hikes in 2019, dramatically underscoring its plan to be "patient" about any further increases. The move to stand pat comes as the central bank pares its forecast of U.S. economic growth this year to 2.1 percent, down from its previous projection of 2.3 percent and the roughly 3 percent pace of expansion in 2018.

"We foresee some weakening, but we don't see a recession," Federal Reserve Chairman Jerome Powell said Wednesday in a press conference. In its policy statement, the Fed said that the job market remains "strong" but noted that "growth of economic activity has slowed" since late 2018.

The Fed announced it was keeping its benchmark rate its current range of 2.25 percent to 2.5 percent and trimmed its expectation of two rate hikes this year to none. It projects one quarter-point rate hike in 2020 and none in 2021.

The Fed also says it will stop shrinking its bond portfolio in September, a step that would help hold down long-term interest rates.

Together, the moves signal no major increases in borrowing rates for consumers and businesses. Some analysts believe the next rate move could be a cut later this year if the economy slows as much as some fear.

The Fed's pause in credit tightening is in response to slowdowns in the U.S. and global economies. It says that while the labor market remains strong, "growth of economic activity has slowed from its solid rate in the fourth quarter."

Powell unfazed

Despite the recent dip in economic growth, Powell said that U.S. "economic fundamentals are still very strong," adding that Fed officials "see a favorable outlook for this year."

Fed policymakers expect the nation's unemployment rate, now at 3.8 percent, to decline a tick to 3.7 percent by year-end. 

Yet some experts think that the Fed's downgraded forecast for growth this year is overly optimistic.

"We expect economic growth to remain well below trend throughout 2019, which is why we think the Fed's next move will be to cut interest rates," Michael Pearce, senior U.S. economist with Capital Economics, said in a note.

The Atlanta Federal Reserve Bank, which provides a so-called "nowcasting" tool to assess current growth, says the economy is growing an anemic 0.4 percent in the first quarter.

The Fed forecasts economic growth of 1.9 percent in 2020.