FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Below is an excerpt from this week’s edition highlighting the most recent moves by the US Federal Reserve.
As expected, the Federal Reserve (Fed) did not move its target interest rate from the range of [2.25-2.5]%. Nine of the ten voting members voted to hold rates. But for the first time under Chair Powell’s tenure, there was a lone dissenting voice in favor of a rate cut. The official Fed statement noted that while market based measures of inflation expectations had fallen, economic fundamentals in the US remained otherwise strong. Following the meeting, Powell noted that while the base case outlook for the US remained strong, trade-based uncertainty and weaker global growth had increased the risk for the economy and could require a future policy response.
Recent uncertainty in the US outlook, as seen in survey-based measures of business activity and in market-based risk perceptions, is the result of trade policy uncertainty. This is a view shared by many Fed officials. However, despite the ongoing trade wars, the US outlook remains strong for 2019, with ongoing labor market strength leading to a virtuous cycle of higher employment and consumer spending. This leads to higher demand for goods and services, which contributes to further employment gains. At this point, we do not expect a rate cut in 2019, and this will not change unless the economic data worsens. However, further trade policy actions may change the outlook.
Recent data confirms our base case outlook for the US economy in 2019 and 2020. The Fed has signaled that it is willing to ease policy if economic conditions deteriorate. However, the gradual slowdown of the US economy going forward, coupled with significant risks of further trade policy actions, should lead to a cautious approach for any expensive new business expansions, especially at current multiples for inorganic growth, and at current costs of labor for organic growth.
Ryan Connelly, Senior Analyst for Global Economics and Scenarios