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No Fed hike this week but don’t rule out more in 2019: economists
WASHINGTON, Jan 27, 2019 (BSS/AFP) – The US Federal Reserve will hold its
fire this week, leaving interest rates untouched and letting markets calm
down after a tumultuous end to 2018.
Coming off Wall Street’s worst December since the Great Depression and
amid mounting fears about the global economy, Fed policymakers are now
unanimously hammering a single message: they will be “patient” before pulling
the trigger again.
Fed Chairman Jerome Powell is likely to stick to that script when he
announces the Federal Open Market Committee’s latest monetary policy decision
on Wednesday.
Futures markets are wagering the central bank will actually stand pat for
all of 2019, with a growing share betting the Fed could even begin cutting
interest rates as soon as next December.
Maybe they should think again.
While a cold wind blew at the end of last year, gathering conditions
suggest the Fed could feel compelled to raise the key lending rate as soon as
the spring, economists say.
“I think the danger here now is that markets are now expecting nothing,”
Ian Shepherdson of Pantheon Macroeconomics said in a presentation on monetary
policy.
“The Fed could swing around on a dime once it becomes clear that the
things that have scared them are no longer very scary.”
The month-long partial shutdown of the federal government — the longest
in history — has been resolved with a provision agreement announced Friday
between the White House and Congress, but was already gnawing away at GDP.
Had the closure, which idled 800,000 federal workers, continued through
March, it could have choked first quarter growth to “zero,” chief White House
economist Kevin Hassett said last week.
The Fed also is flying blind to some extent because the shutdown halted
the flow of economic data from the Commerce Department, including crucial
figures on housing, trade, consumption, wages and inflation. It could get
some key reports next week as the government reopens.
While December saw blockbuster job creation and tame inflation, it had a
batch of very gloomy numbers too.
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Amid President Donald Trump’s trade war with China, the US manufacturing
sector could be starting to crumble, with the sector seeing its biggest one
month drop in December since the global financial crisis.
The economy also saw weak orders for durable goods and disappointing
income growth. And a downward revision to third-quarter growth included the
biggest drop in exports in almost a decade.
Meanwhile, consumer sentiment — which can help predict spending by
ordinary Americans — hit a two-year low.
Add to this the contraction of the German and Japanese economies, and the
slowest Chinese growth in almost three decades, not to mention Wall Street’s
nightmarish ride last month, and investor dyspepsia becomes easy to
understand.
– Pricing in zero hikes? –
Predicting recessions is very tricky and while a contraction seems
unlikely, economists say downside risks are mounting.
Last month, a recession probability indicator from the New York Federal
Reserve Bank put the odds of a downturn within a year at 11.5 percent — the
highest since the depths of the Great Recession in 2009.
But fears of a US recession in 2019 may be “overdone,” said Kathy
Bostjancic, chief US financial market economist at Oxford Economics.
The recent dip in consumer sentiment was to be expected given that the
measures had been so high, she noted.
Oxford expects the Fed raise rates twice this year, with the first in May
at the bank’s third policy meeting of 2019.
“We don’t think they’re done tightening this cycle,” she said. “The Fed
needs to take some time to assess the landscape.”
Shepherdson agreed, warning against counting on no Fed moves this year.
“Pricing in zero is very dangerous.”
He said business investment is likely to be sluggish this year but the
labor market should tighten as unemployment continues to fall, driving up
wages.
That likely would pressure inflation while a host of other potential
dangers to the economy either will be resolved or prove less threatening than
they seemed.
The potential risks include the trade war with China and its slowing
economy, Brexit, the US housing market slump, rising interest rates, high
corporate debt, and a possible recession in manufacturing.
“It’s something of a mess in the first few months of the year. But lift up
your eyes and look to the horizon and not to the ground,” Shepherdson said.
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