Downwardly revised forecasts point to the FOMC remaining on hold in coming months. One more hike is still expected.
In 2019 to date, the FOMC have been cautious on the economic outlook and the need for any further tightening of policy – a stark contrast to the optimistic view put forward at the December 2018 meeting, and the Committee’s expectation then of 3 further hikes.
At their March 2019 meeting, the Committee formally confirmed this shift in stance, with downward revisions to their forecasts for the US’ real economy and their federal funds rate profile. Chair Powell also announced that balance sheet reduction would slow from May and end in September 2019.
Beginning first with the real economy, the decision statement presented a more downbeat view on both the labour market and the activity pulse.
While the labour market is still characterised as “strong” overall, employment growth is now described as only “solid”. The forward view provided in the accompanying Committee forecasts points to only a short-term (very marginal) decline in the unemployment rate hence, with the end-19 through end-21 forecasts respectively 3.7%; 3.8%; and 3.9% compared to its February 2019 level of 3.8%. This implies that the Committee believe employment growth will slow further through 2019, to a month-average nonfarm payrolls pace closer to 100k than the 200k average of recent years.
Coincident to the softening of the labour market is a modest downtrend in activity growth. “Recent indicators point to slower growth [in] household spending and business fixed investment”, with “growth of economic activity… slow[ing] from its solid rate in the fourth quarter”. The Committee’s forecasts make clear that this trend is set to continue, with growth of 2.1% seen in 2019 followed by 1.9% and 1.8% in 2020 and 2021 respectively – the latter outcomes broadly in line with trend or potential growth.
On the back of softer activity growth and a decelerating labour market, headline and core inflation is now seen at or below 2.0%yr over the forecast period.
Given the above domestic views, lingering global risks and with the federal funds rate “now in the broad range of estimates of neutral”, Chair Powell highlighted very clearly in the press conference that he and his colleagues “think that this setting is well-suited to the current outlook, and believe that we should be patient in assessing the need for any change in the stance of policy”.
To that end, the Committee’s projected policy path sees no hikes in 2019 (the view of 11 of 17 Committee members), and only one more hike to a mid-point of 2.625% in 2020.
While the Committee’s longer-run view on the federal funds rate is a touch higher at 2.75%, this is best regarded as being consistent with one further hike (2.75% being the upper bound of the 2.50–2.75% range that gives the 2.625% mid-point).
Marrying the growth and interest rate forecasts presented by the Committee, it is apparent that, to their mind, the risks to the one-more hike view are skewed to the downside. At the same time that the Committee is forecasting the last hike, activity growth is expected to be slowing to trend and the unemployment rate edging higher. These are not circumstances that typically warrant a hike – particularly with little-to-no inflation risk.
Support for this idea can also be found in the dot plot. In 2020 and 2021, 7 and 5 Committee members respectively believe that the federal funds rate will be unchanged – up from just 1 member at the time of the December meeting. While it is clear that the Committee believe external risks will subside from 2020 on, this is not a given. Further, US’ fiscal risks could grow into year end, as the extraordinary stimulus of 2018 comes to an end, and Congress has to decide on the appropriate level of spending from then on.
Our growth and inflation forecasts are broadly in line with those of the Committee at March 2019. And we have regularly highlighted the risks to both consumption and investment from higher interest rates and global uncertainties. However, to our mind, there is still the potential for accelerating wages growth to offset these negatives, with potential consequences for inflation.
As a result, we continue to forecast 1 more hike, most likely in December 2019, after which rates will remain on hold. We will continue to assess momentum and the Committee’s tone hence.
