The Fed sees the factors supporting consumer spending as remaining strong, and is conducting a review into the persistence of low inflation.
Announcing its decision, the Federal Open Market Committee noted that the labor market continues to be strong, and economic activity continues to gain at a “moderate rate.”
However, business investments and exports are not robust. And inflation is still running below the Fed’s targeted 2% rate. The Fed will continue to follow “global developments” as well as “muted inflation pressures” as it determines what its next course of action will be.
James Marple, senior economist at TD Bank, noted in online commentary about the Fed’s policy statement, “The two minor wording changes recognizing the cooling in household spending and below-target inflation move the economic characterization ever so slightly in the dovish direction, but do not tip the scales in a meaningful way.”
In a related news conference following the FOMC’s policy statement announcement, Fed Chair Jerome Powell said, “Monetary policy is a blunt instrument, but a powerful one” and the Fed’s mandate is to do what is best for the economy overall.
Thus, he noted, while low-interest rates haven’t done much for those dependent on interest income and savers, they have helped push up employment levels since the recession, and also aided the recovery in home prices and other financial assets.
Global tensions have eased, but uncertainty remains
While the Fed sees some signs that global growth is stabilizing, uncertainty remains, such as from the potential impact of the recent coronavirus outbreak, which Powell sees as a “very serious” issue.
He expects some global disruption from the outbreak as a result of travel restrictions and business closures. The potential impact is still uncertain and the Fed doesn’t want to speculate about it, but it is “monitoring the situation.” There are certainly implications for Chinese output in the near term, and it remains to be seen what the global impact will be.
On the positive side, the global economy is recovering from a slowdown that began later in 2018, and the outlook presents cause for the Fed to be cautiously optimistic. Financial conditions provide support, trade tensions have eased and the chances that Britain will exit in a disorderly fashion from the European Union (or a hard Brexit) have reduced.
Factors supporting consumer spending remain strong
Powell noted that the U.S economic expansion is now in its 11th year, the longest on record, and the fundamentals supporting household spending are solid.
The U.S. employment situation continues to be strong, with the economy gaining 145,000 jobs last December. The unemployment rate for the month remained steady at 3.5% compared to November but was down from 3.9% for December 2018.
The proportion of working-age adults participating in the labor force, either working or actively looking for work, remained at November’s rate of 63.2% but edged up from 63% for December 2018.
Powell noted that more workers are participating in the economy. Even with historic low levels of unemployment, wages have not moved up as much as they might have. He surmised that this could be because more people are entering the labor market, and this supply of labor is holding down wages. Economy watchers had not anticipated this uptick even a few years ago, and there could still be room to run.
And inflation was up a muted 1.5% for November, according to the personal consumption expenditures index, with core inflation, which excludes volatile food and energy prices, rising a mere 1.6%.
The Fed is conducting a review into the new realities that are impacting inflation (such as the lack of response of inflation to rising levels of employment; low worldwide inflation; and a decline in the natural rate of interest at which the economy performs optimally, without any inflation pressures), and expects to discuss its observations around the middle of the year.