Once again Wall Street is betting that the Federal Reserve will continue to hold rates steady at the FOMC meeting on January 29th. Global confidence seems shaky as the fires continue to burn in Australia and as China is dealing with an outbreak of coronavirus that could become an epidemic.
Consequently, consumers are rattled, and the 10-year treasury is at multi-month lows. What can we expect from the Fed moving forward?
Manufacturing and Inflation Remain Muted
One issue that has been worrying the Fed during this rate reduction cycle is worldwide manufacturing output. However, there has been a recent pickup in U.S. manufacturing activity according to the Flash composite PMI™, but that move is still seen as unspectacular.
Japan has seen an uptick in both manufacturing and services, but the Eurozone’s growth remains flat and Australia’s growth declined more than expected as they continue to fight wildfires all over the country.
Another issue at the top of the Fed’s list is the persistently low inflation the U.S. has experienced throughout the later parts of this expansion. Core PCE, the Fed’s favorite measure, remains far below their 2% target at 1.6% and has been falling since the last rate cut cycle began. CPI, however, has rebounded modestly in recent months and the Fed’s own trimmed mean PCE remains right on target.
Trade Deals and Job Growth Provide Optimism
One positive note from the U.S. economy was the signing of a “phase one” trade deal with China. This deal brought a temporary pause to tariff increases and a slight rollback of tariffs that were already in place. China has also promised an increase in purchases of goods and services from the U.S.
The White House touted this deal as a big win for the U.S. economy, but this will undoubtedly be a lengthy process as the trade negotiations move into phase 2.
Another area of the U.S. Economy that has fueled optimism is the jobs market, which added 145,000 new jobs in December. This increase wasn’t enough to change the unemployment rate that held steady at 3.5%. However, the increase was significant since there was net loss of jobs in the manufacturing sector. The strong labor market has led to high consumer confidence, which is one reason why consumer spending also ended last year on a high note.
When will the Fed Make Another Rate Adjustment?
In December, the Fed’s statement indicated their expectation was that rates would remain stable in the near term. Jerome Powell and company often compared the most recent rate reduction phase to similar phases in the 90’s where there were 3 cuts.
The Atlanta Fed President, Raphael Bostic, recently commented that the Fed is going to let the economy “run and run hot enough to let inflation move.” Inflation and expectations of future inflation have yet to respond to lower interest rates.
The Fed’s own projections from last meeting predict no movements in the policy rate throughout the course of 2020, and only a single rate hike in 2021. The Atlanta Fed’s forecast for fourth quarter GDP in 2019 has retreated sharply in the past few days to 1.8%, down from third quarter’s 2.1%. Without significant data improvements since the December FOMC meeting, imminent changes to the policy rate seem unlikely.
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