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.