WASHINGTON- Friday’s booming US jobs report should give the Federal Reserve all it needs to stick to its plan not to cut interest rates further in the near future, so when US central bankers meet this week, most of the focus will be on their outlook for next year and beyond.
But here’s the rub: They often get it wrong. The coming year – with the added complications of an ongoing trade war and the US presidential election – looks to be no exception.
Alongside their interest-rate decision, Fed policymakers offer up economic and rate projections at every other meeting, and the next iteration of their so-called “dot plot” is due at the end of the two-day policy meeting on Wednesday.
The Fed has made clear that it plans to stand pat on rates barring a “material” change in the US economic outlook. Policymakers will assess how the three interest rate cuts they’ve implemented this year, most recently at the last meeting in October, filter through the economy over the coming months.
Those cuts were characterized as a pre-emptive mini-boost to the world’s largest economy to mitigate the effects of slowing global growth and a 17-month-long US-China trade war.
The Fed hoped to offset fears that a recession in manufacturing and a drop in business investment could spread malaise to the wider economy.
So far the interest rate cuts seem to be working. The Labor Department on Friday reported US job growth increased by the most in 10 months in November and recent data on housing and orders for big-ticket goods have offered a fairly upbeat assessment of the economy.
Fed policymakers are expected to hew close to their aim of a significant pause in marking out where the level of interest rates will be by the end of next year as they strive to keep the longest US economic expansion on record going.
The Fed, however, has a spotty history with its year-ahead interest rate projections, having hit its median forecast only three times since they were introduced in 2011.
This year is shaping up to be their largest miss ever. Last December, the Fed projected two interest rate hikes for 2019, seeing an economy only in danger of overheating.
At the Fed’s September meeting, when projections were last published, eight of the 17 policymakers already forecast interest rates to be at the level they are now through 2020.
“At the moment I think they still feel comfortable saying this is just what we promised,” said Torsten Slok, chief economist at Deutsche Bank Securities.
Traders are betting that the Fed will cut rates once in 2020, according to an analysis of Fed funds futures contracts compiled by the CME Group.
Fed policymakers’ forecasts for future US economic growth this time around will be in sharp focus. In September, policymakers’ projections for 2020 growth ranged from 1.8 percent to 2.1 percent, consistent with what the Fed sees as the economy’s potential growth rate. But if growth ebbs below trend pace next year, that could cause policymakers to ease again.
Chief among the risks to the forecast the Fed has set is the uncertainty caused by President Donald Trump’s chaotic trade policy, given its role in forcing the Fed’s hand this year.
After the Fed’s last meeting, Chair Jerome Powell pointed to a mooted initial US-China trade deal by year end as welcome evidence that economic uncertainty was diminishing for businesses that have repeatedly said the tit-for-tat tariffs were causing them to suspend investments and scrap projects.
Since then, US-China trade talks have stalled and Trump unexpectedly slapped tariffs on steel and aluminum imports from Brazil and Argentina and has also threatened duties of up to 100 percent on French goods. On Tuesday, Trump suggested US-China trade negotiations may not be resolved before the 2020 election, further clouding an already uncertain outlook.
“It’s a tough situation for them because trade policy is still in flux and they’re an election year sounding board for both political parties,” said Satyam Panday, a senior economist at S&P Global.
What seems to be certain though is that the Fed is just as likely to change the level of interest rates in an election year as any other, according to past precedent. – Reuters