Interest Rate Outlook: Rates on Hold
Final FOMC Meeting of 2019
The Federal Reserve met on December 11th and, as expected, left rates unchanged at the 1.50% to 1.75% target range. The FOMC signaled that it has little appetite for adjustments to monetary policy in the near term, saying “the current stance … is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective.” The Fed also noted “global developments and muted inflation pressures” as variables that they will continue to monitor.
The FOMC also updated their quarterly Summary of Economic Projections, and their economic projections were upbeat: a stable unemployment rate at 3.5% at the end of 2020, GDP growth of 2.0% over the same period and an inflation rate of 2.0% by 2021. The latest forecast also revealed that 13 out of 17 members see the Fed on hold in 2020 in terms of any changes to the overnight lending rate while the remaining 4 think that a 25 basis point hike might be needed by the end of next year. The Fed’s median forecast predicted a Fed funds rate of 1.625% at the end of 2020, 1.875% in 2021 and 2.125% by 2022. However, in his press conference following the rate decision, Chair Powell cautioned against placing too much emphasis on dot plot projections. And, in contrast to the dot plot, we note that markets believe the next Fed move is more likely to be downward than upward.
Robust Labor Market
November’s Employment Report revealed a robust labor market. Nonfarm payrolls surged by 266,000 jobs and the unemployment rate fell from 3.6% to 3.5%, close to a 50-year low. The underemployment rate also dropped by 0.1% to 6.9% and the labor force participation rate fell slightly to 63.2% while wage pressures continued to remain subdued with year-over-year growth in average hourly earnings falling to 3.1% from 3.2%. The strength of the data is remarkable given that the current economic expansion is in its 11th year and it suggests that consumer spending will remain a key driver of growth in 2020.
Improving Trade Picture?
There’s some optimism that high profile trade conflicts may finally be on the path to resolution. The contentious relationship between China and the US took a positive step last week as negotiators reached an agreement to roll back existing tariffs, including some that were slated to go into effect this month. On North American trade, the United States-Mexico-Canada Agreement has been backed by Democrats in the House, marking an important political milestone despite the reality that there are hurdles still to be crossed in all three countries before the pact can be approved.
Fed Funds Futures
Markets expectations for additional easing by the Federal Reserve have softened in recent weeks and current fed funds futures contracts are pricing in 86% odds of a full rate cut by the end of 2020.