- After three consecutive rate cuts, the Federal Open Market Committee (FOMC) left the target range for the federal funds rate unchanged at 1.50% to 1.75%. There were no dissenters to this decision.
- The statement’s assessment of current economic conditions was unchanged, noting, as it did in October, strength in household spending, but still-weak business fixed investment and exports.
- The accompanying Summary of Economic Projections were also relatively unchanged. The median FOMC member does not expect any more rate cuts (or hikes) in 2020, leaving the midpoint of the federal funds rate at 1.6%. As in the previous forecast, rate hikes are expected to resume in 2021.
- There were very few changes to other projections, with the median unemployment rate projection marked to its current level of 3.5% for 2020 and roughly 20 basis points lower through the forecast. The longer-run expectation for the unemployment rate was edged lower to 4.1% (4.2%). Core PCE inflation was marked lower for the end of this year, but forecasts left unchanged thereafter.
Key Implications
- No surprises here. The Federal Reserve remains firmly in wait and see mode. The economic outlook has brightened somewhat over the past several months, in no small part due to the three rate cuts the Fed has provided, which has given a lift to consumer spending and housing. Still, potential storm clouds in the way of escalating trade wars or global shocks could yet darken the horizon. The FOMC, like everyone else, will continue to watch how these risks unfold over the next year.
- The one nugget of optimism in the policy statement was the removal of reference to uncertainty around the outlook. Uncertainty remains, but is perhaps not as existential as it seemed in September in the midst of escalating tariffs and rapidly shifting financial conditions.
- We are cautiously optimistic in our view on economic growth over the next year. With solid consumer fundamentals, limited inflation, and supportive financial conditions, the American economy should continue to grow at a pace sufficient to keep the economy near full employment and gradually push inflation toward the Fed’s 2% target.
