Fed Keeps Rates Unchanged and Forecasts no Change in 2020
The Fed left rates unchanged today and forecast no change in the current fed funds rate for all of 2020. The rate decision met the consensus market view, and the updated fed funds median dot plot reflects a Fed that is comfortable keeping the funds rate range at 1.50%-1.75% well into 2020 as the year-end median projection is 1.625%. With GDP growth expected to moderate in 2020, and with inflation expected to be tame, the Fed can afford to wait on the resolution of several geo-political issues that will influence policy when the calendar turns to 2020. The US/China trade deal is obviously issue one and that outcome will either be risk-on (trade deal signed) or risk-off (no deal) with future policy adjusted accordingly. We await the Powell press conference to give us some additional color but we view their stance as this: status quo policy prevails well into 2020 until some of the geo-political issues (US/China trade, Brexit, impeachment proceedings) are resolved and the impact on the economy and inflation are determined.
In addition to today’s rate decision the Fed supplied us with their updated economic and rate outlook. The Fed’s economic forecast is identical to September’s. 2019 GDP is expected to be 2.2% while 2020 was kept at 2.0% and 1.9% in 2021. The expected unemployment rate at year-end 2020 drops from 3.7% to 3.6% with the rate decreasing further to 3.5% in 2020 before ticking higher to 3.6% in 2021, both were 2/10th decreases from the September outlook. More importantly, the longer-run, or equilibrium, unemployment rate was cut again from 4.2% to 4.1%, acknowledging that with actual unemployment well below 4% and largely non-inflationary that the equilibrium unemployment rate is lower than previously thought. Finally, the core inflation rate forecast was unchanged from September with estimates of 1.9% for 2020, and 2.0% in 2021 and longer. It’s a little surprising they didn’t forecast a little higher inflation after recently talking up the symmetrical nature of the 2% target.
The famous (or is that infamous?) dot plots of future fed funds rates was hotly anticipated as investors look ahead to 2020 for signals on Fed policy. The 2020 year-end median fed funds estimate is now 1.625% which is effectively unchanged from today’s rate range of 1.50%-1.75%. The Fed apparently feels comfortable with the current state of policy, and with several geo-political uncertainties still overhanging the outlook, officials decided the better part of valor is to remain patient on rates until some of those uncertainties are resolved. Given those significant unknowns, projections for year-end 2021 are naturally less reliable but the median rate is 1.875%, which implies one rate hike during the year. The longer-run, or neutral, rate estimate was left at 2.50%. Finally, the vote was unanimous. The full text of the statement follows:
Information received since the Federal Open Market Committee met in October indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.
Thomas R. Fitzgerald
Director, Strategy & Research
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