The Fed expects the current economic expansion to continue and is prepared to act as necessary once it gets more input on trade tensions and international growth.
The Federal Reserve took no action on its target interest rate at its June meeting, noting that the labor market remains strong and economic activity is gaining at a moderate pace.
However, it seems expectations for a Fed rate cut later this year have gone up, based on a decline in FOMC members’ expected range for the Fed funds rate this year to 1.9 percent to 2.6 percent at the current meeting, from a projected range of 2.4 percent to 2.9 percent in March.
The Fed’s holding off on rate hikes this year provides some respite for cardholders, with the national average APR on new credit card offers at 17.73 percent – its highest since CreditCards.com began tracking rates in 2007. With today’s rate decision, the Fed’s target for interest rates, which serves as a base rate that credit card rates are tied to, remains in the 2.25 percent to 2.5 percent range.
The Fed also noted that although growth in consumer spending has picked up from earlier in the year, indicators of business fixed investment remain lackluster. The Fed believes the most likely outcome is the current economic expansion will continue, although uncertainty about this forecast has gone up.
Cross currents have gone up
In a related press conference, Fed Chair Jerome Powell noted that in light of the uncertainty and muted inflation the Fed will closely monitor the situation and act as appropriate.
Although the Fed expects inflation to pick up, cross currents remain in the form of trade developments. Since the Fed’s last meeting in April, progress on trade has turned into uncertainty. While the global economy is a concern, the latest data from China has been encouraging.
The Fed also expects inflation to move up slower than expected. (The Consumer Price Index for May rose 1.8 percent over the year, shy of the Fed’s 2 percent target. However, core inflation, which excludes the more volatile food and energy prices, was up 2 percent over the year.)
Powell noted that although the uncertainty surrounding the Fed’s baseline scenario has gone up, “monetary policy should not overreact” since that could “add more uncertainty” to the outlook. Considering that some of the risks are of “recent vintage,” the Fed would like to get more data input before deciding on what course to take at its next meeting.
The Fed would prefer to see a clear trend and see how the risks unfold, rather than just reacting to isolated data points. The FOMC will then move as appropriate to sustain the ongoing long expansion.
In his daily emailed economic commentary, Ian Shepherdson, Pantheon Macroeconomics chief economist, noted, “This statement, the forecasts and the dotplot do not guarantee any easing this year, still less the two cuts markets want to see, at least. If a trade deal is done and growth is robust – this is our base case – the Fed will not want to ease at all. Everything is contingent on trade; developments over the next few weeks hopefully will clarify the picture, one way or the other.”
And Leslie Preston, TD Economics senior economist, noted in an online report, “We have recently shifted our own forecast in favor of Fed rate cuts given increased uncertainty in the global economic outlook, thanks largely to tensions on the trade front. Today’s projections make clear that the Fed is not too far away from our own view, and has committed to ‘act’ if need be.”
Expectations for inflation are lower
Powell also noted that expectations for inflation are down (the FOMC’s projected range for inflation in personal consumption expenditure in 2019 is now 1.4 percent to 1.7 percent, down from an expected 1.6 percent to 2.1 percent range in March). This means that the case for “more accommodation has strengthened.”
Powell expressed concern that “in a world where policy rates are closer to the effective lower bound,” there is a need to be strong on inflation. This is the first time since the Fed started making its public projections for expected rate ranges that this data is pointing to the possibility of rate cuts coming up.
The Fed started making its projections public after the post-financial-crisis recovery started in 2009. While these projections provide useful information, Powell advised that Fed watchers should pay more attention to the bigger picture.
Labor market slack not ruled out
A big piece of this picture is the consumer, and consumer spending continues to remain healthy, backed by rising wages and job gains. The gains from this expansion are also becoming more widespread and benefitting more people.
The Fed is seeing for the first time some groups being brought into the expansion that have not seen prosperity in a long time. Powell is surprised this job growth has not led to more wage inflation, and the Fed is careful about assuming no more slack remains in the labor market.
The Fed’s policy is also supportive of business investment, and it will use its tools as appropriate to sustain the expansion. A range of factors is contributing to uncertainty in the outlook. Thus, the Fed will continue to see whether concerns about global growth and trade uncertainty continue to weigh on the outlook.
About the potential for interference by President Donald Trump, Powell noted that “Our independence is a feature that has served the country and economy well.”