U.S. Outlook: The Fed thinks twice about raising rates again
Chairman Jerome Powell and the FOMC rapidly shied away from further rate hikes at this week’s FOMC meeting. Spooked by slowing U.S. inflation, slowing growth in Europe and China, and bond market signals of more trouble ahead, the Fed retreated further from their rate hike guidance for 2019.
Powell signaled a prolonged pause in further rate hikes and opened the door that the next rate move from the Fed could, in fact, be a rate cut. The FOMC continued to describe current economic conditions as solid and their baseline forecast remains that the U.S. expansion will continue, but the cross-currents of slowing inflation and downside risks to global growth were enough to weaken the case for further rate hikes.
For more on this, see highlights of my report below, followed by a link to the full U.S. Outlook, delivered on Feb. 1.Key observations:
- The Fed estimates that the Fed funds rate is already at the lower-end of estimates of the neutral rate, suggesting that further rate hikes could lead to unfavorably slower growth and an unwelcome period of disinflation.
- Despite robust job growth of 304,000 in January, real consumer inflation pressures appear a long way off. There has been widespread declines in global commodity prices over the past year.
- Given the FOMC’s rapid change of heart and our own forecast that core-PCE inflation will not return to the FOMC’s 2.0% target until the fourth quarter of 2019, we think the Fed is on hold now until the December FOMC meeting, where we are forecasting one final quarter-point rate hike.