The number of rate increases expected by the Federal Reserve in 2019 has dropped from two to one lately, and we’re not seeing anything in the CPI to suggest one is needed now.
While we entered 2019 with the expectation that the Federal Reserve may have two more rate increases in store for us in the coming year, or at least that’s what they were telling us we should expect, the word lately has been that perhaps one rate hike would be all that would be needed this year, and the time for it is not at hand.
Former Fed Chairwoman Janet Yellin took this move to more conservatism a step further last week, suggesting that the next move by the Fed could be to cut rates, in response to weakening economic conditions. This would serve to heat things up, instead of seeking to cool them down with further rate increases.
For this to happen, we would actually have to see economic growth and inflation slow down enough, to the extent that it would be wise to jump in and help the situation along. Given that the Fed’s longer-term outlook does predict rate increases though, with longer-term here meaning the outlook for the current year, a rate decrease would fly in the face of that and even perhaps be counter-productive, if the expectation is that things might be dragging for a short while but heating up enough later in the year to justify needing to be cooled.
This does not mean that these forecasts of the need for rate increases in 2019, either one or two, are correct, and if the economic slowdown is persistent enough, this could not only negate the need for these hikes but require the opposite tactic.
When the Fed tells us that they are practicing patience now, this can mean both holding off on rate increases a little longer as they get a better idea of how this will all play out, as well as holding off on rate decreases as well as they wait to see if conditions actually do deteriorate enough to really warrant a decrease.
Doing Nothing is Often the Best Option
A rate cut may be a short-term fix, but we really don’t want to use this to stimulate the economy if we expect it will do just fine by itself if we just wait. Failing to heed this would lead us to over-compensating for short-term contraction if it just ends up being a short-term phenomenon, needing further correction just to get us back to where we were.
In other words, we should not want to put rates down now when we expect to need to put them up at least once during the coming year, because if this all ends up being needed, we’re meddling with things more than we should and also need to meddle more later to correct past corrections.
The economic results for January that just came in, the consumer price index that is, make it less likely that the Fed will raise rates anytime soon, as while the growth we’re seeing isn’t enough to concern us to the point where we’d want to slow it down, it is not at the point where we’d want to speed it up much either.
Analysts expected only a slight increase in the CPI in January, predicting we’d go up by 0.1%, and this number ended up coming in flat. No change may not be particularly encouraging for the economy, as we expect at least some inflation if the economy is actually growing, although not seeing this number go down can be encouraging.
We don’t want to just shoot for zero inflation though, as we need some of it to have a healthy economy, and negative inflation is clearly not desirable, as we call such things recessions if they are persistent enough. We don’t even need this to go on for very long to actually deem a given negative growth trend an actual recession, and half a year is the benchmark we use to name such things.
We Do Need to Protect Against a Recession Though
There are some people out there who are calling for a recession emerging from the economic slowdown we’ve been seeing lately, but thus far this has just been speculation, and it is only when we see inflation actually go negative and stay there for a while that we can rightly proclaim such things.
A flat CPI, even for a month, may suggest that we’re getting closer to this point, but we also need to consider how we got this result to see how much concern that we may need to have about a result like this.
Falling petroleum prices this time around served to offset price increases for other things, although neither the falling prices from oil derived products nor the slight increase in other sectors ended up being very significant.
Year over year, inflation is now at 1.6%, down from 1.9%. This is a decrease but not one that should worry us too much, and does look like this is well within the zone that we do want to leave alone and not try to either bump up too much, or especially to look to slow down further.
If anything, we indeed should be looking on the side of stimulating such a trend instead of trying to subdue it, if this trend continues to persist that is, and those who see conditions not being such that we should want to raise interest rates do have the support of the numbers backing up their view thus far anyway.
The month over month CPI numbers are interesting, but the year over year data means more since it is reflective of a period of longer duration. This is what we really need to keep our eye on, together with economic forecasts going forward, to keep up to date on where the current trend really is heading, and so far, we’re in a pretty good place overall.