Friday, December 27, 2019

Question #7 for 2020: Will the Fed cut or raise rates in 2020, and if so, by how much?

by Calculated Risk on 12/27/2019 09:30:00 AM

Earlier I posted some questions for next year: Ten Economic Questions for 2020. I'm adding some thoughts, and maybe some predictions for each question.

7) Monetary Policy:  The Fed cut rates three times in 2019.  Currently the Fed is forecasting a long pause in 2020 (no change to policy).   Will the Fed cut or raise rates in 2020, and if so, by how much?

The Fed raised rates once in 2015, once again in 2016, three times in 2017, and four times in 2018.   And then the Fed cut rates three times in 2019.  Currently the target range for the federal funds rate is 1‑1/2 to 1-3/4 percent.

There is a narrow range of views on the FOMC.  As of December, looking at the "dot plot", the FOMC participants see the following number of rate cuts or hikes in 2020:

25bp Rate Hikes
or Cuts in 2020
FOMC
Members
One Rate Cut0
No Change13
One Rate Hike4

Clearly the main view of the FOMC is no change in policy in 2020.

With core PCE inflation below the Fed's target, and around 2% GDP growth - the Fed will likely stay on hold in the first half of the year.   Then, if there is a change in policy, it will likely happen after the election at the December meeting (as happened in 2016).

So my guess is the Fed will stay on hold in 2020 and the FOMC will keep the federal funds rate at 1‑1/2 to 1-3/4 percent.   If there is a change in policy, it will likely happen in December.

Here are the Ten Economic Questions for 2020 and a few predictions:

Question #1 for 2020: How much will the economy grow in 2020?
Question #2 for 2020: Will job creation in 2020 be as strong as in 2019?
Question #3 for 2020: What will the unemployment rate be in December 2020?
Question #4 for 2020: Will the overall participation rate start declining in 2020, or will it move more sideways (or slightly up) in 2020?
Question #5 for 2020: How much will wages increase in 2020?
Question #6 for 2020: Will the core inflation rate rise in 2020? Will too much inflation be a concern in 2020?
Question #7 for 2020: Will the Fed cut or raise rates in 2020, and if so, by how much?
Question #8 for 2020: How much will RI increase in 2020? How about housing starts and new home sales in 2020?
Question #9 for 2020: What will happen with house prices in 2020?
Question #10 for 2020: Will housing inventory increase or decrease in 2020?