December 2019 Fed Preview

NFP Gives Officials More Time

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The Federal Reserve will be holding its final monetary policy meeting for 2019 today.

Heading into the meeting, no changes to interest rates are expected.

The Federal Reserve last cut its rates in September this year, bringing the benchmark Fed funds rate to 1.50% – 1.75%. Today’s no-change will see the second month of rates staying at the current levels.

Fed Funds Rate, October 2019
Fed Funds Rate, October 2019

The central bank meeting comes at a time when economists are trying to figure out where the global and domestic economies are heading. The US is currently enjoying the longest expansionary patch in growth.

But, concerns remain amid signals from some parts of the economy that economic growth could slow. However, the concerns seem to be overblown at this stage. Various measures of the economy point to the fact that there is still some more room for growth.

Since the last Fed meeting in October, the third-quarter GDP figures were finalized. Data showed that the US economy advanced 2.1% in the third quarter ending September. This was a much needed change given that the initial estimates showed a 1.9% growth rate.

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Although the current numbers are far from the 3% growth rate target set by Washington, the slowdown in the economy is in line with the general view.

After lowering rates in September, the central bank announced that it was done with its rate cut cycle for now. While this doesn’t mean that the Fed will be raising rates in the future, it indicated that the central bank will prefer to wait and assess the economy.

Among the major concerns for the Fed remains the trade issue with China.

Payrolls Report Shows Labor Market Resilience

While growth figures indicate a clear slowdown in the economy, the labor market has been very resilient. Last Friday’s figures showed a return to the 200k+ level in payroll numbers.

That being said, it is prudent not to read too much into just one month’s data. The payrolls for October also came out higher than initially expected.

But wage growth did not show any gains, although it remains at a healthy above 3% average rate for the year.

Today’s Fed meeting will also include the monetary policy forecasts on various indicators such as inflation, labor market, and growth. Ahead of the Fed meeting, the monthly inflation data is due.

Estimates show that the annual headline CPI will rise back above the 2% target rate set by the Fed. But officials will more likely wait for the core PCE figures which are tracked by the central bank.

The US unemployment rate fell to 3.5% in November, marking the historic lows last seen just a few months ago.

There is speculation that the central bank will have to lower rates once again in the future. Expectations are rising that this could happen in March next year. But a lot depends on the US economic growth indicators and external factors.

Fed Watch (CME Group)
Fed Watch (CME Group)

In fact, it will only be closer to the end of next week when the status of the trade negotiations will be known. The US is on a deadline for December 15th when a fresh round of tariffs will be levied on goods from China.

Meanwhile, trade talks are progressing, or at least they seem to be. With the current strength in the labor market and the expectations that inflation will start rising again, today’s Fed meeting could be neutral to slightly hawkish.

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