“Give me a one-handed economist. All my economists say, 'On the one hand...' then, 'But on the other...” – Harry Truman
On the one hand, the Federal Reserve announced last week that further rate hikes are on pause and shrinking the Fed balance sheet may end sooner than anticipated. The U.S. economy is solid and inflation is well controlled, said the Fed, but since the rest of the world was a bit wobblier, it would be prudent to wait for more data. Patience is the world of the day. There is nothing like a dovish announcement from the Fed to plump the price of financial assets. The financial markets now believe more strongly that economic growth should continue for a while longer as monetary and fiscal policy stay accommodating. The Fed has our back.
On the other hand, what was so wobbly about the rest of the world to make the Fed rethink both its path of interest rate normalization and the size of its still bloated balance sheet? Chairman Powell laid out the case quite eloquently in the first of the Fed’s expanded news conferences. “Growth has slowed in some major foreign economies,” he said, “Particularly China and Europe. There is elevated uncertainty around several unresolved government policy issues, including Brexit, ongoing trade negotiations, and the effects from the partial government shutdown in the United States. Financial conditions tightened considerably late in 2018, and remain less supportive of growth than they were earlier in 2018.” We applaud the Fed’s new policy of increased transparency, including more frequent press conferences.
Furthermore, we are glad economists only have two hands—more would be too confusing! We see the Fed’s actions as consistent with promoting economic growth and full employment, all within the bounds of its 2.0% inflation target. But we also see economic growth slowing around the world as we approach the later stages of the current economic and credit cycles.
Sources: Bloomberg, the Financial Times, The Federal Reserve