Adam Ozimek, chief economist at Upwork
Today’s decision by the Fed to cut rates by a quarter point marks another step in their pivot towards a more “dovish” approach. The Fed raised rates nine times starting in December 2015, but has held steady in 2019. By cutting rates 25 basis points today the Fed has taken a small step in reversing course as it hopes to inoculate the economy against what it sees as economic headwinds and risks. Concerns over a slowing economy are warranted. A variety of signals suggest the economy’s long recovery from the Great Recession has slowed in 2019. The prime age non-employment rate, an important measure of labor market slack, hasn’t improved this year and wage growth has ceased improving as well. However, the problem is better described as slowing growth than an imminent recession. Job growth has been volatile but has averaged well above where it needs to keep up with underlying population growth. Meanwhile signs of a bubble or serious imbalance in the economy are nowhere to be seen, and consumer spending has held up as well. The Fed’s pivot to greater dovishness will also help reduce recession risk, or rather it means the Fed is less likely to accidentally orchestrate one. The steady rate hikes over the last few years were motivated by what the Fed saw as a labor market that was nearing full-employment. In retrospect, and indeed as much evidence at the time suggested, this was a mistake. The data show the magnitude of the error. At this time in 2015, the FOMC believed that in the long-run the unemployment rate would settle at 5.0% to 5.2%. Today, with the unemployment rate at 3.7% and inflation still below target it’s clear that this was far too pessimistic. The Fed’s growing awareness of this error is positive news. As Chair Powell told the U.S. House of Representatives Financial Services Committee,
“We don’t have any evidence for calling this a hot labor market. To call something hot we need to see some heat.”
More accommodative monetary policy will help bring this heat faster, but the economy is not there yet.
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