Fed Declares ‘Sustained Expansion’ And Low Inflation ‘Likely’

In a moment of unprofound insight lacking sound and fury meaning absolutely nothing to investor expectations, Fed Chief Powell this past week made the most anodyne comments possible that the economy was likely to continue growing. It’s also likely that the Fed has never forecast anything but continued economic growth as it tends to be reactive rather than proactive. When the Fed raised rates twice in the fourth quarter of 2018 against investor wishes, the stock market punished this Fed defiance, plunging over 20%. Fed Chair Powell learned his lesson and instead of raising rates 3 times in 2019 as planned, he reversed course with three rate cuts.

With roughly 2% GDP growth, historically full employment and stable inflation, the Fed has actually been meeting its 1977 Congressional mandate of maximum employment, stable interest rates and low inflation, with no more rate cuts required. While the Fed is technically satisfying its mandate, they also continue to have cover to cut the Funds rate further in 2019 as their preferred inflation measure, core personal consumption expenditures index (PCE), has persistently fallen short of the 2% target. Following the PCE data is important to gauge Fed policy, but we can often glean some advanced inflation warnings and future policy action by looking at the relationship of the more volatile food and energy component of non-core PCE. When food and energy prices began rising faster than core PCE in 2017 and 2018, the Fed used the excuse of future inflation fears to raise the Federal Funds Rate 8 times, even though inflation on average was below their stated target. As core PCE inflation began falling under 2% again in late 2018, with the economically sensitive non-core PCE decelerating even quicker, the Fed realized the error of its ways and assured panicked markets there would be no more rate hikes in 2019 as previously planned. This sudden shift allowed the stock market to soar earlier this year. By July of 2019, the Fed realized the US and Global economy had slowed inflation even further, pushing them to institute several rate cuts over a brief 3 month period recently.

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