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The Fed Keeps Interest Rates Steady

Source:  Austin Business Journal

The Federal Reserve left interest rates unchanged at its final meeting of the year and officials signaled that they would wait to see how the economy fared before making another move.

Officials penciled in no rate changes next year, according to their latest set of quarterly economic projections, and saw only one move in 2021, followed by a second in 2022.

That wait-and-see outlook suggests that Chair Jerome Powell and his colleagues are comfortable with the current level of borrowing costs after ushering in three interest rate cuts between July and late October. Those moves were meant to guard the economy from the fallout of President Donald Trump’s prolonged trade war and slowing growth abroad.

Now, “the committee will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures,” the Fed said in its post-meeting statement.

“The current stance of policy is appropriate to support the expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric 2% objective,” the statement said. Officials dropped their previous caveat that “uncertainties about this outlook remain,” in a sign of their increasing confidence in the economy.

“Job gains have been solid, on average, in recent months, and the unemployment rate has remained low,” the statement said.

But they did not suggest everything was rosy: “Although household spending has been rising at a strong pace, business fixed investment and exports remain weak.”

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Powell’s colleagues lined up uniformly behind the decision to leave policy on hold this month. All 17 Fed officials were comfortable leaving rates unchanged and only four see higher rates in 2020, based on the economic projections, down from nine when the Fed released its last set of quarterly projections in September.

While Trump has been pressuring the Fed to slash interest rates more aggressively, even urging Powell and his colleagues to cut borrowing costs below zero, the central bank operates independently of the White House and answers to Congress.

Lawmakers have given the central bank two goals: achieving and maintaining stable inflation and maximum employment. They adjust interest rates to either speed or slow the economy in a quest to accomplish those goals.

Unemployment is at a 50-year low and the job market continues to grow steadily, which is helping to fuel consumer spending and stoke broader economic growth. Inflation, on the other hand, has been mired below 2% for much of the economic expansion.

While very slow price gains might sound good to everyday consumers, they can create problems if prolonged. The Fed’s policy interest rate incorporates inflation, so weak increases leave the central bank with less room to cut borrowing costs to prop up the economy in the case of an economic downturn.

Fed policymakers see price gains returning to their 2% goal only by the end of 2021, based on their latest economic projections.

Trade remains a critical wild card for the central bank. Trump’s spat with China and other trading partners continues to stoke business uncertainty and weigh on investment, and while the tensions have shown recent signs of easing, how they will end is anyone’s guess. Barring a last-minute delay, another round of tariffs on Chinese goods is to go into effect Sunday, at which point the United States will have imposed levies on nearly every shoe, laptop and bicycle imported from China.

“Policy changes in the speed of a tweet,” said Diane Swonk, chief economist at Grant Thornton. “As good as they feel about things, they also know how fast they can change.”

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