Even though the labor market is strong, there is still slack, and inflation continues to run below target.
In its Dec. 11 news release announcing the decision, the rate-setting Federal Open Market Committee noted that job gains have been solid and household spending has been rising, but business investments and exports remain weak. In addition, inflation has continued to remain below the Fed’s targeted 2% rate.
The FOMC decided that the current rate is appropriate in these circumstances and the Fed 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.”
All the members of the FOMC voted in favor of maintaining the current target interest rate.
Diminished outlook for rate hikes in 2020
Looking at the outlook expectations of Federal Reserve members, it seems they anticipate their target interest rate to not rise much in 2020, falling in the range of 1.6% to 1.9%. As recently as September, Fed members had a more optimistic expectation of a 1.6% to 2.4% range.
They also anticipate that U.S. economic growth will be in the 1.8% to 2.3% range in 2020, with the unemployment rate in the 3.3% to 3.8% range. As for inflation, it is barely expected to hit the Fed’s target in 2020, with an anticipated range of 1.7% to 2.1%.
In a related press conference, Fed Chair Jerome Powell noted that the Fed’s rate cuts this year have kept the economy on track. He said that policy is “not on a preset course” and that “if developments emerge that cause a reassessment of our outlook, we will act appropriately.”
Powell observed that unlike in previous economic cycles in 1995 and 1998, when the Fed made rate cuts and then followed up with hikes, there are differences in this cycle so that forthcoming rate raises are not a given. Considering that inflation is barely moving up, there is less of a need for rate hikes.
It has also emerged that “unemployment can remain at low levels for a long time without creating unwanted upward pressure.”
Before the Fed makes a move to raise rates, Powell would want to see “a significant move up in inflation, which is also persistent.” He expects that getting current trade policy uncertainty out of the way would be a good thing.
According to Powell, both the economy and monetary policy “are now in a good place.”
In October, the Personal Consumption Expenditures index was up 1.3% over the year, while core inflation, stripping out volatile food and energy prices, rose a mere 1.6%. However, it appears to be edging up, going by the Consumer Price Index.
For November, inflation rose to 2.1% over the year, according to this index, with core inflation up 2.3%.
In his daily economic commentary, Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted, “Overall, core CPI inflation is trending at about 2-1/4%, but the y/y rate will rise in the first half of next year due to a combination of base effects, tariff pass-through and, perhaps, sustained upward pressure in health care services. Nothing very terrible is likely, but core inflation could easily hit 2.5% by early spring, for the first time since September 2008.”
Indeed, inflation expectations are trending up, according to the Federal Reserve Bank of New York’s November 2019 survey of consumer expectations. The New York Fed reports that median expectations for inflation three-years ahead rose to 2.5%, from a low for the survey of 2.4% for October. Median expectations for inflation a year ahead were at 2.4%.
Labor market strong, but not tight
Respondents to the New York Fed survey also appear to be more optimistic about the labor market.
For one, fewer consumers anticipated that the U.S. unemployment rate a year ahead will rise, with average expectations for a rise in this measure down 2.2 percentage points to 34.6%. And consumers were also more optimistic about their prospects for landing new jobs if they lost their current ones, with this measure rising to 59.3%, from October’s 58.8%.
The government reported that the U.S. economy added a rousing 266,000 jobs for November, including 254,000 private-sector jobs, as the current economic expansion that began in 2009 continues.
Even then, Powell noted that there is still “slack out there.” The tight labor market means that “people at the margins of the labor force are being pulled in and given chances.”
Also pointing to labor market slack, wage gains have been slow, and more prime-age workers are getting into the labor force. Thus, Powell sees the job market as “strong, but not tight.” That many people are finding new opportunities points to the importance of maintaining economic growth, he noted.