The US Federal Reserve keeps interest rates unchanged, but opens the door to future rate cuts amid rising economic uncertainty. Anthony Okolie talks with James Orlando, Senior Economist, TD Bank Group.
- So no surprises, the Fed left rates unchanged, but James, that the real change was in the language.
- That's exactly right. Prior to this meeting, the Fed had communicated patience. And their patience meant that they wanted to make sure that the US economy was able to handle their current level of interest rates. Now, they're making a U-turn on policy. You recall that six months ago, they actually hiked interest rates.
Now, they're acknowledging the risks to the economic outlook, the domestic economy tariffs, all of that, and they're saying, they're ready to act if the economy deteriorates any further.
- So what's happened in the last six months that has caused everyone to change their outlook?
- Well, so part of it's the overall domestic economy. Employment hasn't blown anyone's socks off. Inflation has been a little bit weaker than everyone was expecting. But you also have this re-escalation of trade tensions. It started with new tariffs on China from the United States. And don't forget, that you also had a brief time period where the US was actually threatening tariffs on Mexico as well.
So the change is that even if you get an agreement on tariffs at the upcoming G20 summit coming up in a few weeks, you actually might have tariff threats and tariff tensions lingering even further.
- So you mentioned tariffs and trade tensions. Do you see and the other risks to the Fed's outlook going forward?
- Yeah, well, there's definitely risks to the outlook. The biggest risk for the Fed though is in communication. You know, they're talking about cutting interest rates. We have eight members of the FOMC that are now forecasting interest rate cuts by 2019. They want to make sure that if they do cut interest rates, it's because the domestic economy warrants it and not because of political pressures.
- And so what are some of the key US economic indicators that you're following going forward?
- So what we want to do is be able to confirm that the US economy is going to keep expanding. That's GDP growth, how that's going to be coming through. We're looking about 2% GDP growth. And the biggest driver of GDP is the US consumer. How is the US consumer doing? If the US-- we look at the unemployment right now, 3.6%.
- A 50-year low.
- Exactly. That's a big deal. And you also look at the fact that wages are expanding at about 3% a year. Now, if more people are working the United States, they're making more money, they're going to spend that money, because expansion keeps going. What you don't want to see is you don't want to see lost jobs, layoffs. You don't want to see-- there's a few indicators we actually track, claims for unemployment insurance, cuts to temporary workers. Temporary workers are usually the first area in line for labor to actually get cut.
So if you start seeing these change, start seeing threats the labor market, that's when you change your view. So we want to make sure that's going to continue going in a positive rate.
- James, thank you very much for your time.
- Thank you.