The Federal Reserve has erased nearly half of all the rate increases of the past two years since July — but now the central bank is expected to halt any further cuts even as President Donald Trump continues to push for more.
The reason: It’s still not clear where the global economy may be heading next year, and any additional rate cuts now will only leave policymakers with fewer tools to help cushion the US if things turn sour.
Federal Reserve Chairman Jerome Powell made clear in congressional testimony last month that while the Fed is reviewing its recession-fighting toolkit, now would be a good time for Congress to address the nation’s ballooning budget deficits in order to be able to use its fiscal firepower when the next downturn hits.
“Putting the federal budget on a sustainable path would aid the long-term vigor of the US economy and help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy if it weakens,” he told lawmakers in November.
The former scholar and private equity investor has repeatedly sent a reassuring message that should the economy weaken, policymakers would have an array of tools to step in, such as resuming bond purchases. But Powell cautioned that “the current low-interest rate environment may limit the ability of monetary policy to support the economy.”
In the past, the Fed has been able to lower its federal funds rate by an average of 5 percentage points in prior downturns, he said. But now, Powell said, “we don’t have that kind of room.”
No imminent risks
While the Fed chairman doesn’t envision an imminent risk to the economy — now in its 11th year of expansion — he has pointed to sluggish global growth and persistent trade uncertainty as two threats. It’s for those reasons that the Fed cut interest rates three times this year starting in July to avoid the US economy from slipping into a recession.
“The Fed has learned the hard way that trade policy can change in the speed of a tweet, one of the major reasons they were forced to cut rates in 2019,” said Diane Swonk, chief economist at Grant Thornton.
Powell has been under tremendous pressure all year avoiding economic landmines triggered by turbulent trade negotiations between the United States and China, while simultaneously dodging Trump’s persistent attacks to slash interest rates to “ZERO.”
More than three weeks ago, the Fed chairman was invited to the White House to meet with Trump and Treasury Secretary Steven Mnuchin.
The President said in a tweet following the meeting that he “protested” to Powell that interest rates were too high compared to other countries the US competes with.
Trump pushing for lower rates
Since last year, Trump has kept up his attacks on his Fed chairman, whom he nominated for the job more than two years ago in November 2017, especially as he makes the economy a centerpiece of his re-election campaign.
“The Fed should lower rates (there is almost no inflation) and loosen, making us competitive with other nations, and manufacturing will SOAR! Dollar is very relative to others,” Trump said in a tweet after data was released in early December showing a fourth straight month decline in US manufacturing activity.
Even so, the world’s largest economy has been holding up well so far as consumers continue to keep spending and job growth showed signs of strengthening even further in November. Powell has more recently described the US economy as a “star performer” and expressed confidence that the expansion can persist.
His comments have helped to reinforce the message that policymakers plan to wait and see how the US economy evolves as long as it stays on track.
“Beyond the December meeting, we see a high bar for policy moves in either direction, and we expect the funds rate to remain unchanged in 2020,” wrote Jan Hatzius, chief economist at investment bank Goldman Sachs, in a note to clients.
Since their last interest-rate policy-setting meeting in October, Powell and his colleagues have made the case that monetary policy is in a “good place” and is unlikely to change for some time unless there is some “material” change.
“The committee has widely signaled a desire to pause after three rate cuts, convinced earlier action is already working to stabilize the economy, a thesis further supported by Friday’s stronger-than-expected jobs report,” said Lindsey Piegza, chief economist at Stifel Fixed Income.
No December change expected
Fed officials are expected to hold rates at their final December meeting on Wednesday, leaving them to hover between 1.5% and 1.75%.
Those plans have also been aided by the fact that trade uncertainty has eased this week with a deal on a revised North American Free Trade Agreement on the table.
And while markets may be pricing in one more rate cut some next year, analysts are doubtful over the likelihood that the Fed will take action for some time to come even if the economy grows stronger than expected.
“Even though they would never admit it to the public, the chances of Fed officials sanctioning a rate hike next year during a politically-charge election campaign are close to zero,” said Paul Ashworth, chief US economist at Capital Economics. “The Fed will be in no rush to hike rates again.”