The Federal Reserve has begun its quiet period prior to the October FOMC meeting which will be held on the 29th and 30th. While the Fed has been accommodative in the past two meetings, there is a growing split in the committee on whether they should cut interest rates further. The downside risks to the U.S. and global economy have not gone away. However, there have been a series of economic indicators in the U.S. that signal the economy is still growing at a decent pace, given such headwinds.
Global Economic Risks Remain a Key Issue for Central Bankers
Economic risk has been on an uptrend across the world and has been the main cause for worry among central bankers. In addition, tariffs have been surrounded by uncertainty for much of the year. Just as the U.S. postpones tariffs on China, the White House approved new tariffs on imports from Europe. The door was opened for these new tariffs after a WTO ruling that the European countries provided Airbus with illegal subsidies.
According to data provided by the Institute of Supply Management, the US manufacturing and agriculture sectors are slowing. Some economists and government officials fear that negative effects of tariffs may be behind these decreases and could be seeping into other parts of the global economy. Geopolitical concerns in the Middle East remain a growing issue, but Britain seems to be inching closer to a Brexit deal.
Despite these risks, U.S. economic data has been solid. The latest jobs numbers saw the unemployment rate drop to 3.5%, the lowest since December 1969. There were also upward revisions of wage growth numbers from previous months. GDP forecasts for 2019 are still sitting at 2.2%, and the Fed’s favorite inflation measure, core PCE, is inching towards the two percent objective.
Slowing U.S. Economy is Still Meeting Projections
Growth in the U.S. economy has shown signs of slowing in recent quarters, but how does that compare with the central bank’s predictions? The Fed releases a summary of economic projections every quarter and headline figures from March 2019 and September 2019 are little changed.
In March, the economy felt less risky than today. That was before this summer’s escalation of the trade war, the Saudi attack on oil, and the election of Boris Johnson in the U.K. – who seems to be willing to accept a no-deal Brexit.
On the other hand, forecasts for GDP in 2019 were revised slightly higher in the September report, from 2.1% to 2.2%. The projection for the 2019 unemployment rate remained the same at 3.7%, and core PCE is projected to climb 0.2% higher to 2%. From this data, we can see the economy doing just as well as expected or maybe even slightly better than March expectations.
Does the current economic data support a cut to interest rates?
Since recent economic data is indicating that we are nearing the Fed’s dual mandate goal of full employment and inflation of 2%, what is the case for further easing? The question on every central banker’s mind is whether the risks are elevated enough to warrant another rate cut.
Monetary policy typically sees a lag in maximum efficacy of 9 months to two years. Some members of the committee want to see the central bank pause the current round of easing until the Fed can assess the effectiveness of the prior two rate cuts. Others make the argument that there is enough risk to the economy that the Fed needs to make multiple “insurance cuts” to circumvent a slowdown.
What Will Be the Central Bank’s Decision on Interest Rates?
As of this writing, CME Group’s FedWatch Tool estimates the current probability of a rate cut to be 93.5%, with an 6.5% chance of rates remaining the same. The strong probability is supported by the Fed doing little to dispel the consensus on Wall Street that a rate cut is coming this month. If the Fed cuts rates at this meeting, investors will be paying close attention to Fed Chair Jerome Powell’s comments to find clues into the how the Fed sees the future of interest rates.
A growing mass of the Fed’s voting body are vocal about their reluctance to provide the economy with more stimulus until the economy starts to show signs of broad weakness. Given the high number of dissenting votes at the prior FOMC meeting, most believe that the Fed will cut rates one more time to appease Wall Street, then set the bar for future rate cuts much higher.
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