November 2019 U.S. Economic Outlook

Robert A. Dye, Ph.D.


Daniel Sanabria


As widely expected, the Federal Reserve announced on October 30 that it will cut the fed funds rate range by 25 basis points to 1.50-1.75 percent.

The Rate Cuts, the Pause, and the Fed’s Next Move

    As widely expected, the Federal Reserve announced on October 30 that it will cut the fed funds rate range by 25 basis points to 1.50-1.75 percent. The written policy announcement was little changed from September 18. The policy announcement has been whittled down to three paragraphs. The first paragraph, which describes the current economic environment, highlighted the strong U.S. labor market and household spending. It also noted, that business fixed investment and exports remain weak. In the second paragraph, the Fed cited two reasons for the rate cut, global cooling and muted inflation pressure. The third paragraph describes the data that the Fed is monitoring: (1) labor market conditions, (2) inflation and inflation expectations, (3) financial market developments and (4) international developments.
    In his post-meeting press conference, Fed Chair Jay Powell indicated that he would like to pause and not make further cuts, at least in the near term. Powell said that the current stance of monetary policy is likely to remain appropriate as long as U.S. and global data hold up. When asked about what would cause the Fed to continue to cut interest rates, Powell said that it would take a material reassessment of the Fed’s outlook. When asked about the possibility of future rate hikes, Powell said that he is not thinking about raising rates soon and that it would take a persistent uptick in inflation for him to change that view.
    The key question now is, how long will the Fed’s pause last? A useful comparison is the experience of the 1990s. The U.S. economy fell into recession in mid-1990. The Fed began lowering interest rates from a high of about 8.25 percent in early 1990, to a floor of about 3.0 percent by the end of 1992. That floor, which lasted until early 1994, roughly corresponds to the floor in the fed funds rate at near-zero that we experienced from late 2008 until late 2015. Beginning in early 1994, the Fed then raised the fed funds rate by a total of 300 basis points, to about 6 percent by early 1995. Reversing course, the Fed lowered the fed funds rate by about 75 basis points to roughly 5.25 percent from mid-1995 to early 1996. That reversal corresponds to what we have seen this year, a 75 basis point rate cut after a tightening cycle.
    After the 75 basis point cut into early 1996, the Fed then paused for about a year. The next move was up in early 1997, increasing the fed funds rate by 25 basis points to around 5.50 percent. The Fed then paused at 5.50 percent for about a year and a half, before cutting by another 75 basis points into late 1998. So including a minor 25 basis point adjustment, the Fed’s pause in the late 1990s lasted about two and a half years. The next big move after the long pause was to continue cutting interest rates.
    We look for a similar pattern to emerge now. After an initial 75 basis points worth of interest rate cuts, the Fed will pause for as long as it can, and then it may be forced to cut interest rates again if the U.S. economy continues to cool and inflation remains weak.
    In our November interest rate forecast, we have removed our December 11 fed funds rate cut. However, we have kept our 25 basis point rate cut for June 2020 in place. We believe that downside risks to the global economic outlook remain dominant, and so it is appropriate to have a “place-holder” rate cut in the forecast at mid-year 2020 to show that we expect the next interest rate move by the Fed to be down. As economic data and Fed communication evolves, we will adjust our outlook.
    Through October, labor market data remained positive. The U.S. economy added a better-than-expected 128,000 net new jobs for the month, and the unemployment rate inched up to 3.6 percent. Expectations were low because of the now-resolved GM/UAW strike, which removed almost 50,000 workers from October payrolls. Those workers will be counted as employed again in the November labor data, which will be released on December 6.

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November 4, 2019
Robert A. Dye, Ph.D., Senior Vice President and Chief Economist at Comerica Bank

Robert A. Dye, Ph.D.

Senior Vice President and Chief Economist
Daniel Sanabria, Senior Economist at Comerica Bank

Daniel Sanabria

Senior Economist

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