Adam Ozimek, chief economist at Upwork
The Federal Reserve remains in wait-and-see mode with today’s decision to hold rates steady at a range of 1.5% to 1.75%. With no rate hike projections, the Fed expects this approach to continue into 2020.This hold steady approach follows a period of rate cuts and an overall pivot towards dovishness. This pivot has ultimately been driven by two forces; Rising headwinds from trade wars and the Fed’s recognition of more slack in the labor market.. While the perceptions of a recession risk have diminished, remaining slack in the labor market provides ample reason for accomodate rates to continue.Indeed, the Fed’s projections released today suggest that the pivot to dovishness is incomplete. While Chair Powell has recently emphasized that the “economy can sustain much lower unemployment than we originally thought without troubling levels of inflation,'' the Fed projects that long-run unemployment rate is nevertheless 0.6 percentage points above where it is today. This suggests they believe current unemployment is, in fact, not sustainable in the long-run.
Similarly, the Fed’s projections suggest they do not believe that inflation will reach target until 2021. While rates are accommodative, they are not accommodative enough that the Fed believes it will reach target inflation in the near-term, let alone allowing the kind of above target catch-up inflation many have advocated for.Overall, despite businesses’ complaints that it is difficult to find workers, continued job growth alongside modest wage growth suggests there are plenty of workers to hire, businesses simply have to work harder to find them. With inflation still below target, and the Fed expecting it to remain so for some time, there is a strong case that the labor market will continue to get tighter over the next two years.
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