The Era of Low Interest Rates Continues
by Cliff Waldman, Chief Economist
It is unlikely that even the most prescient of economic forecasters and Fed watchers could have predicted the picture of U.S. monetary policy at this juncture. About nine years after skirting the precipice of a global financial collapse, policy normalization has barely gotten out of the gate. In June 2017 the Fed raised the target for its influential federal funds rate by 25 basis points, only the fourth such move since the Great Recession bottomed in the early summer of 2009. The much-expected adjustment of the massive balance sheet has yet to begin. The yield on the bell weather 10-year Treasury note is around 2.3%. Without context, one would think that the U.S. economy is just coming out of a difficult downturn-not eight years into a recovery and expansion period.
Had the Federal Open Market Committee (FOMC) once again raised the Fed funds target at today’s meeting, it would have been a significant event for financial markets. By today’s standards, two consecutive hikes in policy interest rates would have signaled a measurable acceleration in the pace of monetary tightening and thus some confidence in the U.S. economy’s ability to weather at least moderately higher interest rates. The FOMC punted on another move and released a statement that smacks of trepidation on the sustainable strength of the U.S. economy. They acknowledge that job gains have been solid and that consumer spending and business fixed investment have continued to expand. The troubling point remains inflation, and they are quite concerned.
In a rather telling statement from today’s press release, the Fed notes that “Near-term risks to the economic outlook appear roughly balanced but the Committee is monitoring inflation developments closely.” Thus, “The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.” It’s a mystery. We are eight years past the trough of a recession, the unemployment rate is at a 16-year low, and monetary policy is still governed by fears of too low inflation.
A full understanding of the inflation conundrum requires a broad look at the macro environment. Underneath a sluggish, on-again, off-again economic recovery, there is not only a strange inflation picture but a nearly four-decade low in labor force participation, along with a weak labor productivity story. Concurrently, demographic shifts are constraining economic growth around the world, particularly in the advanced economies. Economists need to work quickly to shed light on a new environment. One thing is certain. The era of low interest rates continues-at least for now.