Sometimes there's more to a Fed meeting than meets the eye.
It's widely expected that when the Federal Open Market Committee (FOMC) wraps up its meeting next week it will leave interest rates unchanged - a break from a run of interest-rate cuts at three straight Fed meetings this year. That doesn't mean the Fed won't make a significant announcement at the meeting's conclusion.
With this being the last FOMC meeting of the year, it may go a long way toward setting the tone for 2020. That includes providing insights into both the Fed's expectations for the economy next year and its monetary policy plans in response.
New Fed Projections for 2020
Next week's Fed meeting will yield a fresh set of projections for how FOMC members believe key economic variables will perform in 2020 - and beyond.
Once a quarter, the FOMC provides updated projections for how it expects GDP, unemployment, inflation and the federal funds rate to behave over each of the next three fiscal years.
The latest update to these projections is due at the conclusion of next week's meeting. Any change in those projections is a window into whether the Fed thinks the economy is getting better, worse or staying the same - and into what the Fed may do about it.
Fed Interest Rates and Inflation
Perhaps the best clue as to what the Fed's next move will be on interest rates is its projections for inflation in 2020.
The Fed has long had a target of maintaining the inflation rate at or around 2.0%. While historically trying to keep a lid on inflation has been a major concern for the Fed at times, lately the issue has been trying to get inflation to rise to that 2.0% target.
Inflation has been persistently below 2.0%. Over the past year, the Personal Consumption Expenditures Price Index, a measure of inflation the Fed prefers to the Consumer Price Index, has risen by just 1.4%.
In terms of how the Fed can use interest rates to influence inflation, think of interest rates and inflation as being on opposite ends of a lever. If the Fed is concerned enough about inflation being too low, one response might be to lower interest rates to boost inflation.
The updated inflation projections the Fed will release at the end of its next meeting will indicate whether the Fed expects low inflation to be persistent enough to warrant a more aggressive approach to reviving it.
From a consumer's perspective, low inflation may seem like a good thing, and trying to rouse the beast could be a dangerous game. However, the big problem with low inflation is that it can be a symptom of a weak economy.
Will the Fed Calm Recession Fears?
Very low inflation can be a sign that there is too little demand in the economy to give sellers any pricing power. Also, low inflation can further dampen the economy because, when prices aren't rising much, it gives consumers no sense of urgency about buying now.
Though concern about a possible recession has entered the economic conversation over the past year, what 2019 has produced so far is a mixed bag of economic results. Recent weeks have been no different.
The day before Thanksgiving saw the Bureau of Economic Analysis (BEA) update its estimate of third quarter real GDP growth to an annual rate of 2.1%. That's not great, but it is a slight improvement over the second quarter's annual growth rate of 2.0% and the BEA's original estimate for the third quarter of 1.9%.
Trade wars and the next recession
However, early the following week, the stock market took some significant hits on renewed concern about trade tensions. President Trump reinstated steel tariffs on Argentina and Brazil, widening the trade war while also indicating that a trade deal with China may not come till after next year's election.
Trade wars are motivated by a desire to win an advantage over a foreign economy, but they can quickly turn into a lose-lose game as both countries do less business and/or face rising prices due to new tariffs.
With the current economic expansion having already lasted more than a decade, and with signs of weakness appearing in some areas of the U.S. economy, a concern is that the trade war could provide the kind of shocks that trigger the next recession.
Therefore, economists and the financial markets will be looking to see how the Fed addresses this next week. It might do this by way of its comments on the threat of trade tensions, or it might even go so far as to outline new policy initiatives beyond its recent interest-rate reductions.
Any new policy to address a weakening economy would be a mixed blessing. It may provide a policy response that heads off a recession, but it would also be an indication that the Fed views current threats to the economy as serious enough to require unusual action.
What Consumers Should Expect
While the Fed's three rate cuts in 2019 were its first since 2008, the context is that interest rates were already unusually low going into this year.
That means it would be unrealistic to expect further fed rate cuts to be a magic bullet that could stop the next recession. After a decade of unusually low interest rates, it may be that the ability of low interest rates to stimulate the economy has been exhausted. In any case, the Fed has limited room for further interest-rate cuts.
However, even without the Fed making another rate cut or announcing a new policy initiative in next week's meeting, consumers should be aware that interest rates generally are very much on the move.
After all, when the Fed raises or lowers interest rates, it's not like pushing a button which makes all consumer rates, from savings account rates to mortgages, immediately respond by the same amount. There are competitive and profitability concerns that drive the rates financial institutions offer to consumers, not to mention attempts to anticipate future federal-funds-rate moves before they happen.
The three fed-rate cuts earlier this year, and the economic uncertainty that prompted those cuts, have already put rates on financial products in motion. That makes this an especially important time for consumers to do some smart shopping for a better deal, because rates may now be very different from the last time they checked.
Previous Federal Reserve Board Updates articles:
|FOMC Date||2019 FOMC Meeting Update Articles|
|10/30/2019||October, 2019 - What the Latest Fed-Rate Cut Means to You|
|09/11/2019||September 2019 Fed Meeting: How to Protect Your Money|
|08/01/2019||July 2019 Fed Meeting Raises New Questions|
|06/20/2019||Consumers Not Limited by Fed's Rate Decision|
|05/2/2019||Federal Reserve Pursues Rate Stability|
|03/21/2019||Shifting Stance: Fed Implies No Rate Increases in 2019|
|1/31/2019||Fed's Low Profile Won't Stop Interest Rates from Rising|