Blog Federal Reserve Appears Confident in U.S. Economy's Soft Landing In its December forecasts, the Federal Reserve estimates that the policy rate will hold steady through 2020. Will economic and trade developments change that view?
The Fed held its policy rate steady at December’s meeting, as was widely expected. Positive signs in the U.S. economy since the rate cut in October seem to have increased the Federal Reserve’s confidence that its “mid-cycle adjustment” (three cuts in a row) has helped engineer a soft landing, and that further cuts are unnecessary. Still, rate hikes likely aren’t imminent either, as inflationary pressures still look manageable. Encouraging economic developments While we still think the Fed’s above-consensus 2% forecast for 2020 real growth is optimistic, a handful of recent data points have been encouraging and support the Fed’s view. First, global manufacturing PMIs (purchasing managers’ indices) appear to have bottomed, suggesting that global industrial production and trade growth, which have weighed on domestic activity, may also be bottoming. Second, early industry reports suggest holiday spending has been robust and recent data suggests labor market momentum appears to be recovering; these are both encouraging signs about the resilience of the U.S. consumer and economy. And third, while U.S.–China trade policy remains a key uncertainty, the negative economic effects of the September tariff hikes thus far seem to be less than feared. Hike requirements: persistent and significant inflation At the same time, underscoring the high bar for rate hikes, inflation needs to be “persistent” and “significant” before the Fed hikes rates again, according to Fed Chair Jerome Powell. Inflation and inflationary pressures currently look manageable. We expect PCE (personal consumption expenditures) inflation will continue to run below the Fed’s 2% target, at least over our cyclical horizon. Unit labor cost inflation was revised lower and is currently running at 2.2%, while nominal wage inflation appears to have peaked at 3.4% in early 2019. Overall, Wednesday’s statement, press conference, and projections reflect a view that while downside risks have eased somewhat, policy is likely to stay moderately accommodative for some time in order to support inflation and inflation expectations. Updated Fed forecasts indicate no more rate cuts Language changes in the December statement emphasized the Fed’s preference to keep rates on hold. It removed the reference to uncertainties to the outlook, replacing it with a balanced pledge to continue to monitor global developments and inflationary pressures. Meanwhile, the updated Statement of Economic Projections showed a unanimous view that while further rate cuts won’t be necessary, future rate hikes will be after 2020 and very gradual. Tiffany Wilding is a PIMCO economist focusing on the U.S. and is a regular contributor to the PIMCO Blog.
Blog Credit Where Credit Is Due: Four Common Misconceptions in Public and Private Credit Markets Heightened market volatility has led to misconceptions about credit, in our view. We dispel four of them here.
Blog China’s Property Sector Slump: Is Recovery on the Horizon? In the absence of immediate and substantive policy easing at the national level, we believe that the sector could pose a serious risk to the government’s GDP growth target in 2022.
Blog Fed Outlook: Expeditious but Nimble Federal Reserve hikes policy rate 50 basis points, while remaining flexible in fighting inflation.
Asset Allocation Outlook Late‑Cycle Strategies We assess risks and potential opportunities for multi-asset portfolios amid late-cycle dynamics, higher inflation, rising interest rates, and geopolitical uncertainty.
Viewpoints Hotel Market in a Post‑COVID World Hotels have recovered from the depths of the pandemic, but markets continue to evolve and the recovery has been uneven.
Blog Bank of Canada: Hike More Now, Less Later The Bank of Canada embarked on a swift tightening path, but secular forces still weigh on the longer-run interest rate outlook.
Blog Fed Outlook: Expeditious but Nimble Federal Reserve hikes policy rate 50 basis points, while remaining flexible in fighting inflation.
Blog Tug of War: The Fed Begins a Rate‑Hiking Cycle as Inflation Trumps Uncertainty The U.S. Federal Reserve raised the policy rate at the March meeting and signaled more hikes to come given the risks from high inflation.
Blog Fed Focused on Getting Back Toward Neutral The Federal Reserve pulls forward rate hike expectations and doubles the pace of tapering in an effort to provide more flexibility to react in 2022.