The Federal Reserve’s (Fed) final policy meeting of 2019 starts today and will conclude tomorrow with the release of the Fed’s policy statement, updated economic projections, and a press conference by Fed Chair Jerome Powell. After lowering its main policy rate at each of its last three meetings, the Fed is widely expected to pause as it gauges the impact of the recent cuts and the state of the economy.
It was a little less than a year ago, on December 19, 2018, that the Fed announced the fourth rate hike of 2018 and the ninth of the current expansion. Markets roundly jeered the move. The S&P 500 Index, already down more than 13% from its all-time high in September 2018, fell to 19.8% off the all-time high by December 24, just a hair below the customary 20% decline that marks a bear market. The Fed quickly adjusted its messaging and, as shown in the LPL Research Chart of the Day, the S&P 500 has climbed nearly 25% year to date.
While appearing to be reasonable based on data available at the time, in retrospect, that fourth rate hike may looks like a mistake. What have we and the Fed learned in the past year?
- Market signals matter. We don’t want markets to drive the Fed, but markets can provide useful feedback that economic data misses. Markets were signaling that rates were likely too high for the environment we were in.
- Trade uncertainty has weighed on the U.S. and global economy more than expected, and the Fed probably underestimated the impact.
- There was still some slack in labor markets, and inflation remains contained for now. Weaker growth has kept inflation in check and has easily outweighed the price impact of tariffs.
“There’s a learning curve for every Fed chair, and Jerome Powell has been no exception,” commented LPL Research Chief Investment Strategist John Lynch. “But we’ve been encouraged by the Fed’s policy approach in 2019 and think that a pause is appropriate given the more positive signals we’re getting on the economy.”
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