The last meeting of the Federal Reserve (Fed) this year has maintained the interest rates, in line with market expectations. However, unlike what happened previously, the Fed had, in the interpretation of monetary policy trends, offered a more optimistic forecast on the U.S. economy. It hinted that the cost of borrowing may remain unchanged for a long period of time, expecting the economy to grow moderately in the coming election year and the unemployment rate will remain low. This also means that the Fed's monetary policy trend is changing. The latest Fed economic forecasts show that 13 out of 17 policymakers expected to keep interest rates unchanged at least until 2021. The other 4 policymakers expected to raise interest rates only once next year. Their view is opposite to the view of common investors of lowering interest rates. This is indeed worthy of attention.
The reason is that the new economic situation has caused the Fed to change its motive for interest rate cut. Fed's chair Jerome Powell has previously expressed in the first interest rate cut that "rate cut is a mid-term adjustment". The recent development shows that this view has returned to reality. Powell said at a press conference after the policy meeting that despite the continuous risk of global situation and development, the U.S. economic outlook remains good. At the same time no policymaker will think a rate cut next year is appropriate. The Fed estimates that the United States' GDP will grow by 2% next year and by 1.9% in 2021. This shows that the Fed believes after a turbulent year, the U.S. economy has achieved a "soft landing", so the significance of future interest rate cuts to stimulate the economy is no longer important.
However, the direction of the U.S. economy is still not clear. This is the reason why the Fed's monetary policy has entered an "observation period." The Fed points out that as the U.S.-China trade war continues and inflation remains sluggish, it is necessary to monitor closely global risks. In addition to the external uncertainty brought about by the U.S.-China trade friction, the more important factor worthy of observation by the Fed is U.S. inflation rate. Employment and inflation should have been consistent in the Fed's policy goals. However, in recent years, the divergence between inflation and employment is the reason why the Fed has difficulty in making decisions and this is also the reason for much of the criticisms against it. The latest data show that the unemployment rate in the United States in November fell by 0.1% point from the previous month to 3.5%, the lowest point in 50 years. But the inflation rate is still lower than the Fed's target. The just-released core U.S. November CPI index shows that it is 2.3%, similar to October's CPI index. The core PCE index tracked by the Federal Reserve was 1.6% in October and the estimate for November is far below the policy goal of 2%. The median forecast of the Federal Reserve is that the unemployment rate is expected to remain at the current level of 3.5% until next year. It will only rise to 3.6% in 2021. Inflation is expected to climb to only 1.9% next year, showing inflation rate and low unemployment rate remain out of touch. Does persistent low inflation mean insufficient demand? This has left the Fed confused and worried.
Therefore, this type of departure also made the Fed to be in an awkward situation and unable to act. BlackRock's global report also shows that, given the performance of U.S. data, the Fed may not interfere with the interest rate policy for a long time, even throughout 2020. The stability of the labor market means that the net increase in employment can last for a long time and there is no need to worry too much about any substantial slowdown in the economy.
This "structural" contradiction of the U.S. economy has made the Federal Reserve afraid to act for quite some time, which may be the reason why it "observes the trend of the U.S. economy". Powell stated that, "We have realized that the unemployment rate can be kept fairly low for a considerable period without putting unfounded upward pressure on inflation". In fact, these forecasts also suggest that the Fed still expects the interest rates are to remain loose. Some analysts believe that at least by 2022, interest rates will fall below the Fed's estimated neutral level of 2.5% that the Fed will neither stimulate nor inhibit. Moreover, the Fed continues to inject liquidity into the market to ease the tension and to realize the regulation of market interest rates.
However, unlike the better employment situation, there are signs that the U.S. economy may slow down in the fourth quarter due to the cooling of consumer spending and the continued decline in corporate investment. Forecasting firm Macroeconomic Advisers estimates that the fourth-quarter GDP of the U.S. will slow to 1.8%. According to the Wall Street Journal, Oxford Economic Research Institute believes that the latest data shows that the U.S. economy will not fall off the cliff immediately, but economic activity will further weaken in the next few months. These structural contradictions of the U.S. economy also mean that the Federal Reserve cannot have clear expectations about the direction of the U.S. economy, and there is no way to have a clear outlook on monetary policy.
Final analysis conclusion:
As the Fed 's monetary policy enters the phase of "wait-and-see", it is expected to affect the policies of the Eurozone and other countries, gradually relaxing the pace of global monetary easing, in addition to relaxing the increasingly negative interest rate environment. In this context, promoting structural reforms will increasingly be on the policy agenda.
