The Fed Ties a Bow on 2019

Economic Blog
December 12, 2019

The Federal Reserve (Fed) officially tied a bow on 2019 with another policy pivot.

On December 11, the Fed announced it would leave rates unchanged, concluding a string of three 25-basis point (0.25%) rate cuts from July to October.

Investors expected the Fed would leave rates unchanged after Fed Chair Jerome Powell clearly messaged the end of rate cuts at the previous meeting. What was more interesting, though, was policymakers’ rate projections, illustrated on the updated “dot plot.” As shown in the LPL Chart of the Day, policymakers now expect the fed funds rate to stay unchanged through the end of 2020, before moving higher over the next two years.

12_12_2019 Blog Chart

According to the dots, the Fed expects rates to move higher on the way to a more neutral stance, when policy would be neither accommodative nor restrictive. To us, that’s a vote of confidence in the U.S. economy, which has responded positively to rate cuts. The global outlook appears to be improving as well, with the United States and China moving closer to a limited trade agreement.

“The updated dots reminded investors that the cuts earlier this year truly were a mid-cycle adjustment,” said LPL Financial Chief Investment Strategist John Lynch. “To be clear, though, we think the Fed would need to see a substantial pickup in inflation before resuming rate hikes. The U.S. economy is slowly growing, and a pause is warranted.”

Economic data and expectations support a Fed pause. Year-over-year Core Personal Consumption Expenditures growth is still below 2% (the Fed’s inflation target), and policymakers have forecasted that the gauge probably will remain under 2% until 2021. However, the Fed has projected near-trend economic growth and low unemployment ahead.

Of course, we try not to read too much into the dots. Powell emphasized in his post-meeting press conference that the Fed ultimately looks at data when deciding on policy changes, and policymakers can’t predict the future.

We’ll see what 2020 brings.

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