The outcome of this week’s FOMC meeting largely met my expectations. The Fed left rates unchanged, following through on their signaling from the October meeting. More importantly, this month’s dot-plot indicates that the vast majority of FOMC participants believe rates will remain unchanged in 2020. Barring a dramatic shift in the direction of the economy, the Fed expects they can drift into the background next year and watch their soft-landing play out.
In the FOMC statement, the most notable change was this language in October:
This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.
to this now:
The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective. The Committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.
Critically, the Fed dropped the reference to “uncertainties” in the outlook. This indicates that they are much more confident in the outlook, apparently believing they have now done enough to keep the economy on track. This suggests that the bar to another rate cut has edged higher from last October. They really need a “material” change in the outlook to take rates down another notch.
At the same time, however, the bar to a rate hike is still even higher. The dot-plot revealed that all but four meeting participants expect rates to remain unchanged in 2020; the remaining four expect only a single hike. Remember there was a subset of members opposed to any rate cuts so they would be looking to reverse sooner than later. Overall, there is virtually no expectation that the Fed needs to consider reversing this year’s rate cuts anytime soon. Rate hikes are anticipated in 2021 and beyond, but that is simply too far off to be very relevant at this point. In some sense, this is really just an artifact of the models; given persistently low unemployment, the models will forecast higher rates to stave off inflationary pressures.
Median growth forecasts were unchanged from September as the Fed retains the basic outlook for steady growth near trend. Unemployment forecasts edged down, unsurprisingly given the November employment report. The longer-run estimate of the unemployment rate dropped 0.1 percentage points as persistently low inflation bolsters the Fed’s confidence that estimates of the natural rate of unemployment are still too high. The longer-run estimate of the federal funds rate held at 2.5%; I had though we might see a downward revision.
Powell’s press conference was decidedly dovish. He wants to see persistent and significant inflation before raising rates and reiterated that the labor market can’t really be described as hot unless wage growth accelerates. Basically no indication that he is worried about the economy overheating.
Bottom Line: The Fed did almost exactly as expected this week, offering confidence in the outlook while making clear they had no intention of raising rates in the context of that outlook. To be sure, if conditions change, the Fed will too. But for now they have taken themselves off the table, looking for some well-deserved rest.