Fed Patience Doesn’t Imply a Rate Cut

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Special Guest Blogger: Tim Kearney

Was the recent growth pause a refresher? Nonfarm payroll growth averaged a healthy 180,000 per month in 1Q19; just about 100,000 are needed to keep the unemployment rate steady. March PMIs were solid with new orders up; auto sales spiked to a solid 17.5 million. The consensus for 1Q19 is edging back towards above-trend GDP growth of 2%. Which brings us to the Federal Reserve: while the GDP growth rate seems to be slowing towards trend, it is not there yet and there is a risk that both the Fed and market participants may be getting ahead of themselves with expectations for a rate cut.

The current fed funds rate is still a bit accommodative — even more so if a cut materializes within the next nine months. That would imply continuing growth at or above trend, as well as inflation moving back toward target. Hence, the Fed is going to be wrestling with the nexus of growth/inflation, which currently shows low inflation with above-trend growth. In our view, the Fed is now analyzing its target goals and has a high bar to change its current stance, but “patience” means data watching is an important element of its analysis.

Our conclusion is that the developing consensus of a pause with a cut within a year is premature. The Fed has signaled it won’t change its tone until more data come through the pipeline. If those data show continued above-trend growth, it may force the Fed’s hand, but for a good reason.

Please follow fed funds target rate and U.S. Treasury yields on page 34 of the Global Perspectives book.

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