The Federal Reserve has attracted much attention recently for how it has managed interest rates.
The Fed has clearly taken a more dovish approach to rates for 2019. Last year they were content to raise by 25bps each quarter, and even making their position more hawkish by dropping the language “the stance of monetary policy remains accommodative.”
Many anticipated that they would hold the line for 2019 with three additional 25bps increases. Now, with the economy showing some cooling, everything has changed. White House advisor Larry Kudlow has said there is no emergency, but the Fed should cut rates 50bps as a “protective measure” to keep this “great economic re-emergence intact.” The administration expected the normal seasonal sluggishness of Q1, then getting back on track for 3% economic growth for 2019. We see this as reasonable and likely given there haven’t been significant signs of inflation.
The Federal Reserve kept the target range for the federal funds rate at 2.25 percent during its May meeting, saying “economic activity has been rising at a solid rate, and that labor market remains strong.” Interest rates in the United States averaged 5.67 percent from 1971 until 2019, reaching as high as 20 percent in March of 1980 and a record low of 0.25 percent in December of 2008.
Fed Funds Rate May 1999 to May 2019
The current outlook is tame. The Fed will maintain its position on the sideline for the near future. They are a data driven body, so as long as we see more of the same I don’t expect them to make headlines for 2019. Yes, Fed funds analysts continue to price in an easing as the next move and the CPI data has seen implied rates dip as the chances for an easing by early 2020 as a possibility.
The implied October contract trades at 2.275%, compared to the 2.375% midpoint of the FOMC’s target band, while the January 2020 contract is at 2.15%, nearly fully priced for a 25 bp easing. We have to wait and see how all of the tariff stress affects the expectations, consumer sentiment and the markets. While the unemployment rate is at an historic low, the actual rate could be lower than estimated. The consumer can absorb a 10% tariff, but 25% is enough to more than wipe out the entire Trump Tax Cut benefit! We are at the point where increases passed on to consumers, pushing prices up, will be felt by everyone.
Annual inflation rate in the United States fell to 1.9 percent in December of 2018 from 2.2 percent in November, matching market expectations. It is the lowest inflation rate since August of 2017, mainly due to a decline in gasoline cost. On a monthly basis, consumer prices edged down 0.1 percent after a flat reading in the previous month and also in line with forecasts. It is the first monthly decrease in consumer prices in nine months, due to a 7.5 percent slump in gasoline prices.