Tags: fed | rate | cut | economy growth

Hold On to Your Wallets, People! We Are In for a Rough Ride

Hold On to Your Wallets, People! We Are In for a Rough Ride
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Wednesday, 18 September 2019 05:13 PM Current | Bio | Archive

In a Nutshell: “In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent.”

Decision: Fed funds rate target range reduced to 1.75% to 2.00%.

As expected, the Fed cut the funds rate today. But while some were wishing and hoping for a half point or more reduction, the FOMC decided on a simple one-quarter point move.

That’s the bare acts. But the move was maybe the least interesting and important aspect of what happened. First, the statement that was released was extremely upbeat about the economy. Indeed, the description of household spending was even more positive than in the previous meeting’s statement. And the forecast for 2019 growth was increased slightly. Another way of saying this is: The economy is in good shape so they had to cut rates.

Actually, the major concern was the trade war, which has created slower business spending and global economic concerns. That was what Fed Chair referenced often in his press conference to explain why the FOMC was worried enough about growth to cut rates.

The second eye-opener was the extent to which the Fed is split. Three members voted against the move, which is extremely unusual. Even more fascinating was that two didn’t want to reduce rates at all while the third wanted to lower rates by 50 basis points – polar opposites.

But what to do today was not really the major point of contention. In looking at the dot-plot of expected future rate cuts, there was no consensus about whether there should be another rate cut. More members expected rates to be at or even above the new level than expect it to below. That is the same for 2020. The median estimate for the funds rate for this year and next was 1.9%, which is precisely where it is now. In other words, there is no consensus for another rate cut.

There were a couple of other important tidbits that came out of the Fed Chair’s press conference. First, he made it clear the Fed had ruled out negative interest rates. Yeah! Second, Mr. Powell focused on the economy softening and noted often that if it did so, the Fed would embark on a sequence of rate cuts to try to keep the expansion going. While cutting rates significantly when facing a major slowdown is not surprising, what is interesting is that he didn’t talk at all about the possibility of the economy accelerating and what that might mean for monetary policy. I make that out to be a bias toward weaker growth and lower rates.

So, what should we take away form today’s actions? Most importantly, don’t assume there will be additional rate cuts. However, if the trade war worsens and the threatened additional tariff hikes are implemented, then the likelihood of further rate cuts would rise.

Essentially, the fate of the world’s economy rests on trade war strategy and the hotter the war, the greater the possibility of a global economic slowdown. While the Fed would react by reducing rates, it is not clear if it has the weapons to counteract an emerging global recession. So hold on to your wallets people, we are in for a rough ride.

(The next FOMC meeting is October 29-30, 2019.)

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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Essentially, the fate of the world’s economy rests on trade war strategy and the hotter the war, the greater the possibility of a global economic slowdown.
fed, rate, cut, economy growth
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2019-13-18
Wednesday, 18 September 2019 05:13 PM
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