The Federal Open Market Committee (FOMC) voted to keep its target range for the fed funds rate unchanged at 0.25 to 0.50 percent.  Three members dissented:  Esther George (Kansas), Loretta Mester (Cleveland) and Eric Rosengren (Boston).

 

Nine months have elapsed since the FOMC increased its target federal fund rate range by 0.25 percentage points.  Since that time, the unemployment rate has fallen from 5.0 percent to 4.9 percent, while GDP grew at an average annual rate of only 0.95 percent during the first six months of 2016.  It would take more than 3.05 percent growth over the third and fourth quarters to reach above an average 2 percent growth for 2016.  The Federal Reserve Bank of Atlanta’s GDPNow forecast currently predicts a 2.9 percent increase in real GDP for the third quarter.  Some Fed officials worry that continuing to keep interest rates low to stimulate employment further could trigger unacceptably high levels of inflation. 

 

The “dot plot” projections that accompany the FOMC’s press release cut the Fed’s 2016 growth estimate, and substantially lowered projections for interest rates into 2018.

 

Note: Median projection; Source: Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents

Context

As families try to adjust their budgets in the face of rising housing and health care costs, economists see little potential for higher economic growth rates. 

While many policy analysts may accept a “new normal” of 2 percent GDP growth, many more Americans do not.  Recent Gallup polling rates “the economy” as the number one U.S. problem.  The “good news, bad news” nature of current employment and economic statistics leaves households, workers, and employers confused and looking for better answers:

• The rate of job creation rose to an average of 232,000 in the last three months, after a slow start in 2016. The average monthly payroll job increase so far in 2016 is 182,000. Despite the upbeat jobs news, the Labor Market Conditions Index (LMCI) returned to its negative trend.
•  The number of job openings in July rose to a record-breaking 5.9 million. However, areas of the United States experienced healthy job gains and wage increases but some regions continue to struggle.
• Wages continue to increase, while worker productivity continues to decline. Sagging worker productivity operates as a drag on economic growth, so it remains unlikely that GDP growth will strengthen until productivity improves.
• Real median household income jumped 5.2% last year, but workers worry about employer cuts to benefits and hours that erode these income gains. 
• Good jobs news is mostly for job seekers with only short-term breaks in employment.  However, the broader U-6 unemployment rate, which also measures the unemployed plus discouraged job-hunters and part-timers seeking full-time work, remains elevated at 9.7 percent.  Long-term unemployed workers still make up more than a quarter of all jobless.
• More than half of workers age 50 or older expect to work during their retirement years – and most of those expecting to work cite “financial reasons.”  Lower returns on nest-egg savings increase income insecurity, thereby changing retirement lifestyles.

Even investors are confused. Money magazine tells small investors to ignore the “to raise or not to raise” market noise.

 

With Brexit Past, Markets Track Japan’s Central Bank Decisions

The Federal Reserve continues to monitor global events, which exhibit less strength than the tepid U.S. economy and represent external risk:

• The Bank of England’s (BOE) first move after the Brexit vote was to hold base interest rates steady.  However, BOE members indicated that they expect to cut the base rate further before the year’s end.
• The Bank of Japan (BOJ) policy meeting is getting as much investor attention as the FOMC.  The BOJ adopted new monetary policy tactics with a shift in focus to controlling its bond yields through the volume of its asset purchases.
• China has undertaken aggressive economic growth measures that push stimulus-driven deficit spending to unsustainable levels, leaving some economists wondering what the impact will be when the spending ends.

 

The Bigger Picture

Nearly seven years after the financial crisis, U.S. economic growth remains slow, while federal debt continues to rise.  The Congressional Budget Office estimates the FY16 deficit to be $590 billion—one third higher than the year before.  Publicly held federal debt totals $14 trillion (gross federal debt, including intragovernmental holdings, amounts to nearly $20 trillion in total).  The Fed owns 20 percent of the Treasury’s debt—making it the world’s largest owner of Treasuries.  As of September 14, the Fed’s balance sheet reported total assets of $4.5 trillion, approximately the same level as it has been for the past two years. In recent speeches, Chair Janet Yellen has been clear that Fed asset holdings are not falling anytime soon.