WASHINGTON: A year ago, US Federal Reserve Chair Jerome Powell held a “remarkably positive outlook” for an economy enjoying a “historically rare” combination of good news including low unemployment, steady inflation and strong growth that were all expected to continue.
When the Fed meets this week, the discussion will be about just how badly that outlook has eroded, and whether officials should still describe themselves as simply tinkering with policies that are about right, or embarked on a more aggressive fight to keep the US recovery on track.
A headline decision to cut interest rates by a quarter of a percentage point is widely expected. More importantly, the Fed’s language and new economic projections will show how deeply a summer of trouble has been felt — from an intensifying US-China trade war and the relaunch of crisis-style stimulus by the European Central Bank to a stream of weak manufacturing data that may hint at larger problems for the US.
“At the end of 2018 it looked like the economy was moving forward in a continued solid manner,” said David Wilcox, director for the Fed’s division of statistics and research until the end of last year and now a fellow at the Peterson Institute for International Economics.
“The risks were predominantly to the upside and it was not prominent on our radar screen or anybody’s that the trade war’s machinations would be taken to the extent that they have been … The news from abroad, by wide consensus, has been disappointing.”
The US Federal Open Market Committee meets on Tuesday and Wednesday, with a press conference by Powell scheduled to follow the release of the central bank’s statement. The Fed’s likely action to lower its target policy rate to a range of between 1.75 percent and 2 percent, policymakers hope, will boost the economy by easing borrowing costs on everything from car loans to corporate bonds.
Markdowns at the Fed
Since the end of last year, Fed decisions — to take rate hikes off the table in January and then to cut rates in July for the first time in a decade — have helped drive the average 30-year fixed rate home mortgage from an eight-year high of 4.94 percent to around 3.5 percent, for example, enough to save a homeowner more than $200 a month on a $250,000 loan. Since the July rate cut corporate bond issuance has surged as firms take advantage of record low long-term borrowing rates, saving them money or providing capital for projects.
Between September 2018 and their last set of quarterly forecasts issued in June, Fed officials slashed half a percentage point of expected growth from their median projection for 2019 and marked down inflation further away from their 2 percent target.
At that September 2018 meeting, they had also projected that the fed funds rate would hit 3.1 percent by the end of 2019. It is currently at around 2.1 percent and likely heading lower.
New projections issued Wednesday will show whether officials think things are getting worse, and how much further they think they need to go in terms of rate cuts or other steps to stay ahead of any developing problems.
It’s a tough call that has divided Fed officials among those who want to cut fast and deep, those who want to go slow, and those who want to do nothing at all.
It’s all the economies
US data have been mixed since the Fed last met in July. Business investment has remained weak. Indicators of manufacturing output fell. Employment growth slowed.
Yet even at the lower-than-expected level of 130,000, the number of jobs created in August is more than enough to absorb new entrants into the workforce and keep the unemployment rate at 3.7 percent.
Wage growth has continued, and “consumers remain the locomotive of the economy,” JP Morgan economist Michael Feroli said after retail sales jumped more than expected in August.
“There is little reason to expect a near-term retrenchment,” as households benefit from a tight job market and, if the Fed cuts interest rates as anticipated, lower costs to fund home improvements or other large purchases.
In his final public comments before the upcoming meeting, Powell described the US labor market as in “quite a strong position,” and downplayed any risk of recession in the US. Yet it is not just US data Powell is concerned with.
