Well, 2018’s third quarter earnings season is history. It was pretty much a repeat of both the first and second quarters. The U.S. economy will stay strong in 2019 and inflation will tick-up above 2% and so the U.S. central bank should continue to raise interest rates gradually, New York Fed President John Williams said Tuesday. “Given this outlook of strong growth, strong labor market and inflation near our goal and taking account all the various risks around the outlook, I do expect further gradual increases in interest rates will best sponsor a sustained economic expansion,” Williams said at a press briefing.
The Fed’s last policy statement used the word “strong” five times in describing the U.S. economy, he noted. “It accurately represents where we are,” he said. The New York Fed president said growth will slow in 2019, but only a bit, to a 2.5% annual rate from near 3% this year as the Trump tax cut will continue to provide a “tailwind” to activity. Williams said expects the unemployment rate to edge slightly below 3.5% rate over the next year. The last time the unemployment rate was lower than 3.5% was in July 1969.
Inflation will move only a little above the Fed’s 2% target, he said. “Importantly I don’t see any sign of greater inflationary pressures on the horizon,” he said. Williams is a member of Fed Chairman Jerome Powell’s inner-circle of advisors. He gets to vote at every interest-rate meeting. In keeping with remarks by Powell, Williams stressed that the Fed will evaluate incoming data to gauge the precise stance of policy.
Investors still see a chance the Fed will raise interest rates by a quarter point in December, according the CME Group’s FedWatch tool, which derives projections from futures trades. But the market has growing doubts about the health of the economy, seeing only one rate hike in 2019, well below the Fed’s latest projection in September of three more increases.
The concerns about the outlook as pushed the yield on the 10-year Treasury below 3% this week, the lowest level since early September. Another sign of investor fear is a flattening yield curve, or the spread between short-dated and long-date yields. Williams said he is alert to signs that the economy may slow faster than he expects, but that his baseline forecast is “still very positive.”
“There are risks on the horizon,” he said. Williams said his comments are consistent with Powell’s recent remark that the Fed’s policy rate was “just below” neutral.
Once again, if you were to read the headlines, you would be led to believe the end-of-times was near. Reporter anxiety continues to run high and, at time, almost hysterical. The continuing trade spat between the U.S. and China (and other countries), the threats from North Korea and Iran, the geopolitical risk from a populist Italy and a messy Brexit, or any one of several Trump tweets all ensured the fear-based media operated in full-on mode. Of course, this in turn has fed market volatility, which has risen considerably in 2018.
Having said that and as mentioned in our 2nd quarter economic update blog, there are indications businesses are taking a wait-and-see approach. Key leading indicators are beginning to slow somewhat. While the business environment continues to be positive, the political static around global trade is causing them to take a more cautious and measured approach to business investments, which is prudent.