Stockholm (Ekonamik) – This week was dominated by two events in the USA: the monetary policy meeting of the Federal Open Markets Committee (FOMC) on Wednesday, May 1st, and the publication of labour market data for the USA on Friday, May 3rd.
The US Bureau of Labour Statistics (BLS)’s non-farm payroll report for April showed that the US economy added 263,000 new jobs in April, pushing unemployment down to 3.6% from 3.8%. This is the lowest unemployment rate since December 1969. “Among the major worker groups, the unemployment rates declined in April for adult men (3.4 percent), adult women (3.1%), Whites (3.1%), Asians (2.2%), and Hispanics (4.2%). The jobless rates for teenagers (13%) and Blacks (6.7%) showed little or no change,” the report stated. The Nasdaq closed at a record high on the back of this positive data release.
Two days earlier, the Federal Reserve decided to hold its policy interest rate constant in a range between 2.25% and 2.5%. The press conference following the monetary policy decision added some conditionality to forward guidance, which seems to have grabbed the attention of analysts.
“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,” stated the press release. “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2% inflation objective.”
The statement was in line with the expectations of Daniel Vernazza, Chief UK & Senior Global Economist at Unicredit Bank who predicted the Fed would “stay in its patient and neutral stance”. He further argued that “as core inflation remains muted in many countries, despite higher wage growth, central banks have the room to be patient. If history is anything to go by, central banks will not shift back to a tightening bias anytime soon.”
Market expectations have been shifting since the previous meeting and the consensus had recently moved towards rate cut bias rather than the previous rate increase. “Over the medium run, we suspect a rate cut is more likely than a hike, though neither is impossible. The market has priced in half of a cut by September,” said RBC Global Asset Management’s Chief Economist Eric Lascelles at the beginning of the week.
However, at the Q&A session following the FOMC statement, Fed Chairman Powell made comments that have since led the market to question this shift. Discussing the drivers of inflation, the central banker argued that the FOMC “suspects transitory factors may be at work,” before adding that “If we did see inflation running persistently below, that is something the committee would be concerned about and something we would take into account when setting policy.”
“We expect the momentum to fade in the coming quarters but not to an extent that warrants a rate cut by the Fed,” according to Northern Trust’s May 2019 Global Economic Outlook. “As long as economic performance persists, we expect one hike in 2020.”
In others news, Trump withdrew Stephen Moore from contention for one of the two open seats on the FOMC. Shortly after the nominee had stated he was “all in” and that the president was his strongest supporter. Moore’s recent disagreement with Trump on interest rates seems the most likely motivation for Trump’s tweet that Moore had paradoxically “decided to withdraw from the Fed process”. The decision follows two months of controversy over President Trump’s appointments and comes after the other nominee, Herman Cain, also dropped out. Instead of being a relief, the decision highlights that even the smallest hint of independence from Trump’s nominees is not suitable to the US President. The threat to the independence and credibility of the Fed and its damaging potential to the global economy cannot be understated.
Picture © Federal Reserve System of the USA.