Fed Doesn’t Change Rates & Might Not In 2020 Either

Review Of The “Unimportant” Fed Meeting

This wasn’t a hotly anticipated Fed meeting because the Fed wasn’t expected to hike or cut rates, the decision was widely priced in, and the Fed shouldn’t act at the next meeting either. There was very little uncertainty about the January meeting as well (few expect a change then). 

This wasn’t a market moving meeting. However, it was important because it was one of the meetings where the Fed updates its forecasts. These are always important. 

Fed did exactly what was expected and guided for what many predicted. It didn’t change rates and guided for no change in 2020. However, don’t take this to be a great prediction. There was close to a 100% chance the Fed wouldn’t change rates. 

Most of the guidance and statements from the Fed were consistent with what it said at the past few meetings. You’ll need to wait until the end of 2020 to determine if the prediction from a few weeks ago that it won’t cut rates next year is accurate.

Changes To The Statement

First, let'slook at changes to the Fed statement. then changes to the Fed’s guidance. Finally, I’ll review the press conference Powell gave. Keep in mind that this is the last meeting with this group of FOMC members. Next year there will be some new members rotated in. Some say the next group will be a bit more dovish than this group. 

As you can see from the image below, there weren’t big changes to the statement, but I’ll still review them individually. Fed got rid of the entire clause where it said “in light of implications of global developments for the economic outlook as well as muted inflation pressures” and replaced it with nothing. 

To me, this is a hawkish change because the Fed isn’t mentioning the weakening global economy. As usual, it’s a fair change because some of the data implies global growth is starting to turn.

Next change is semantics. We can’t figure out the point of changing the wording slightly. A final change was that the Fed got rid of the point that expansion continuing, labor market staying strong, and inflation being near its target “are the most likely outcomes, but uncertainties about this outlook remain.” 

Later on, it added that it will monitor “global developments and muted inflation pressures.” It gets back to the point of the Fed getting rid of its emphasis that the economy is uncertain. This is a hawkish change. Remember, one of the reasons the Fed cut rates this year is the global slowdown. That can be interpreted as responding to tariffs if you think tariffs are partially the reason why global growth slowed.

Changes To The Fed’s Guidance

The table below reviews the changes to the Fed’s guidance from September. As you can see, there was exactly no change to the expectations for GDP growth. Only interesting aspect here is that the Fed sees growth slowing 0.2% in 2020. Even though the stock market is pricing in growth accelerating. 

1H 2020 growth should be higher than 2H 2019 growth. I expect business investment to pickup next year after being negative for 3 straight quarters in 2019. It’s tough for the consumer to get much better though as spending has been strong. Technically, this is a slightly optimistic estimate because the longer run growth rate is estimated to be 1.9%.

Unemployment rate estimates were lowered to reflect the recent strong BLS reports. The current unemployment rate is 3.5%. 2020 estimate fell from 3.7% to 3.5%. Longer run estimate fell from 4.2% to 4.1%. Fed has continually underestimated how low the unemployment rate could go this cycle. It always thought the rate was structurally high. However, it was never structurally high. And it just took a while for the labor market to recover from the terrible recession.

PCE and core PCE inflation rate estimates for 2020 stayed the same at 1.9% for both. A good chunk of the headline inflation increase is because of oil prices. It’s important to recognize that the Fed sees a slight increase in inflation coming because it has stated that it won’t hike rates in 2020 unless inflation spikes. 

Therefore, inflation would need to increase more than this forecast to count as a spike. Core PCE inflation hasn’t moved quickly in years. I highly doubt there will be a big spike. It could get above 2% for a couple of months, but it won’t increase enough to catalyze a rate hike.  

Finally, the Fed lowered its guidance for 2020 rates to reflect the recent cut. It still doesn’t plan to hike or cut rates in 2020. At the September meeting, 9 members saw a hike and 8 saw no hike. Now, only 4 members see a hike out of 17. Members will change in 2020.

Powell’s Statement

Powell stuck to what he stated in previous press conferences. Fed won’t hike rates in 2020 unless inflation spikes. He said, “In order to move rates up, I would want to see inflation that’s persistent and that’s significant. A significant move up in inflation that’s also persistent before raising rates to address inflation concerns. That’s my view.” 

He added that “We haven’t tried to turn it into some sort of official forward guidance. It happens to be my view that that’s what it would take to want to move interest rates up in order to deal with inflation.”

Since the Fed sees inflation increasing slightly and isn’t projecting a rate hike next year, it is basically agreeing with what Powell has said even though he says it’s not official Fed policy. It doesn’t make much sense to hike rates right after cutting them. Especially when core PCE inflation has been below the Fed’s target for most of this expansion. It might get above 2% when the comps are easy, but there won’t be an inflation scare in 2020. 

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1 Comment

  • Thomas Leong

    December 13, 2019

    I thought the goal of the FED was to create inflation and destroy purchasing power so the banks can steal everything. Does JP's statement “In order to move rates up, I would want to see inflation that’s persistent and that’s significant. A significant move up in inflation that’s also persistent before raising rates to address inflation concerns. That’s my view.” mean he's a failure.