As Expected Fed Keeps Rates Unchanged — Cuts Rate & Economic Forecasts
The Fed left rates unchanged today and cut December’s three hike forecast to one, with that occurring in 2020. While the rate decision was a foregone conclusion, the real drama was whether the Fed would match the dovishness expected by investors with the statement, updated rate and economic forecasts, and post-meeting press conference. They seemed to have accomplished that. While we await the Powell presser, the statement continued a trend begun in December by toning down enthusiasm for the economy and expressing continued concern over the global slowdown. By keeping the phrase, “In light of global economic and financial developments and muted inflation pressures” it is a nod that the global slowdown is showing no signs of reversing and the uncertainty over the U.S./China trade talks and Brexit, among other geo-political issues, continues to weigh on the outlook. The other big question today was whether the Fed would comment on the tapering of its balance sheet. In a separate statement the Fed said it expected the run-off to be completed by September with a slowing in the run-off from $30 billion/month to $15 billion beginning in May. In summary, the Fed seems to have met the markets’ dovish expectations and then some by cutting its rate-hiking expectations, tempering its economic growth forecasts, and slowing and identifying an end to balance sheet tapering.
As was the case in December, the Fed’s economic outlook was slightly downgraded. 2019 GDP is now expected to be 2.1% (vs. 2.3% in the prior forecast) while 2020 was cut to 1.9% from 2.0% and 2021 remained at 1.8%. The expected unemployment rate at year-end 2019 rose from 3.5% in the prior forecast to 3.7% with the rate increasing to 3.8% in 2020 and 3.9% in 2021, both 1/10th increases over the December outlook. More importantly, the longer-run, or equilibrium, unemployment rate was cut to 4.3% from 4.4%, which is an acknowledgment that with actual unemployment well below 4% it has largely been non-inflationary. Finally, expected core inflation rates were left unchanged from December with 2.0% core PCE expected throughout the forecasting period.
While the expected rate hikes were cut from December’s total of three to one—with that one hike occurring in 2020— the longer-run or neutral rate median was unchanged at 2.75%. That being said, there was a generalized move lower in the longer-run rate forecast with four participants forecasting a 2.50% neutral rate in December versus six who did so at today’s meeting. Thus, with the federal funds rate range at 2.25%-2.50%, leaving one hike in the forecast seems appropriate if the economic outlook brightens. That would allow a final hike into the neutral range of 2.75%that the FOMC is coalescing around. The vote was unanimous and the full text of the statement follows:
Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low.
Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12- month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and 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. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.
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 FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; 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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