The majority of Wall Street believes the end of this round of monetary easing is nearing completion after three reductions of the policy rate by the Federal Reserve. But given some mediocre data as of late, can we really be so sure? And what direction will interest rates be headed in the future?
The Good Economic Data
Since the last FOMC meeting there has been some good data surfacing around the United States and other major economies. To start, the third quarter saw expectation beating GDP growth at 2.1%, continued near 50-year low unemployment rate, and a stock market that has been reaching new heights for the past few weeks. IHS Markit’s service PMI in the US rose, signaling that the manufacturing slowdown has not trickled down to the other half of the economy.
Globally, official NBS China statistics show the first expansion in manufacturing since April, and HIS Markit shows a low but rising PMI in the Euro-zone. Optimism for a trade deal between the US and China has been brewing and it is reflected by the stock market and relative strength of manufacturing abroad.
The Not-So-Good Economic Data
Wednesday, the ADP national employment report saw the creation of only 67,000 new private sector jobs in the month of October, well below the 6 month average of 116,00. The biggest drag on these numbers was sizeable losses in goods sectors and areas of services relating to trade and transport.
Inflation is still below target and the Fed’s favorite, core PCE, has been decelerating since August. Also, overall manufacturing production in the US had performed below expectations and fell further into contractionary territory in the month of November. All of this coupled with four months of falling consumer confidence is weighing on growth in the U.S.. Some economists still worry that this weakness could spread to the rest of the economy.
Why did The Fed adjust rates before?
Economic heads winds created by uncertainty with trade and slowing global growth were cited as the main cause for policy rate cuts at the last three meetings, in addition to lower than desired inflation. However, Fed Chair Jerome Powell recently spoke about monetary policy at the Greater Providence Chamber of Commerce. He added another justification for the three rate reductions made this year when he mentioned that last year’s economy was not as strong as initially thought.
The Fed raised rates four times in 2018 as the economy was given a boost from the Tax Cuts and Jobs Act. The final rate hike in December has been the target of much scrutiny. Many saw it as unnecessary tightening and the stock market reacted very negatively. In hindsight, Fed officials may have over tightened. They have since revised their neutral rate projections down and have reduced interest rates accordingly.
What will it take to move rates now?
Consensus among the central bankers is that they are happy with how the economy has shaped up over the last year, given a trade war and deteriorating global growth. While more rate cuts are possible, three insurance cuts seem to be customary when compared to similar Fed easing cycles of the past. Fed Chair Jerome Powell has often cited similar financial instances in 1995 and 1998. Indications point to The Fed remaining largely data dependent as they continue to monitor the effects of the prior three cuts.
Movement in the other direction doesn’t seem likely in the near term. In front of Congress in October, Jerome Powell stated, “we would need to see a really significant move-up in inflation that’s persistent before we would consider raising rates.” This is in line with the FOMC’s projections from September, with the median projections of 2020 fed funds rate at 1.9%.
What’s next with interest rates and The Fed?
To get the full scoop on the statement made by Fed Chairman Powell after this month’s meeting, be sure to follow us on Twitter, Facebook and Linkedin. We will provide a summary and reaction to the meeting following its conclusion.
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