Daniel T. Fink
Assistant Vice President,
Marketing and Client Service
In his latest meeting, Federal Reserve (Fed) Chairman Jerome Powell messaged that the Fed will remain patient regarding further rate hikes until inflation accelerates, after recent market turmoil had many questioning the previous Fed policy of continued and gradual rate hikes. Powell’s pronouncement came amid fears of a potential global economic slowdown, increased trade tensions, and previous Fed rate hikes. These headwinds mask a U.S. economy that looks healthy by most measurable statistics. It’s increasingly apparent that the success of the Federal Reserve’s mandate, i.e. maximum employment and controlling inflation, is contingent upon forces outside of its direct control. Forecasting Fed behavior is certainly not something we will get into on these pages. However, there are a series of variables that Fed officials focus on when determining future interest rate policy.
The Fed has consistently reiterated that further rate hikes are indeed data (plural) dependent, although inflation will continue to be the most closely watched metric. Current Fed policy is to benchmark inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE)… consistent over the longer run with the Federal Reserve’s statutory mandate.
Wage growth has been accelerating through our current tightening regime. The Fed does not directly target wage growth, however, they do watch for its potential impact on inflation. High levels of wage growth could present the Fed with the cost-push inflation justification for further rate hikes.
State of the Global Economy
Clearly, Federal Reserve Chairman Powell has been convinced by recent global market turmoil that caution is in the Fed’s best interest. Elevated U.S. rates highlight how the current U.S. economic cycle far outpaces other global economies.
After analyzing current data and Fed statements, we feel the Fed has justifiably moved to a more neutral position regarding future rate hikes.
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