The Federal Reserve keeps interest rates unchanged and signals no further rate hikes. Anthony Okolie talks with Derek Burleton, Deputy Chief Economist, TD Bank Group.
- So not a big surprise the Fed left rates unchanged. Derek, did anything stand out for you today?
- A couple of things, not that they were surprising, but still noteworthy. The Fed did give a nod to the fact that economic growth in the US has picked up in recent months. We, of course, had that stronger than expected first-quarter economic performance at--
- I think it's up 3.2%. Yeah, based on numbers.
- 3.2%. But at the same time, did acknowledge that spending had slowed at the same time. The other thing, of course-- and this is what markets were looking for-- there was focus on the fact core inflation has been running below the 2% target. But apart from that, the statement was very much as expected. In the end, the Fed's going to be very data-dependent with respect to any future monetary policy decisions.
- Are there any changes to your forecasts for interest rates in 2019 and 2020? Have they changed?
- Yeah, we think the Fed is done. We've felt that way for a while. I think just the fact they continue to preach patience, that's consistent with our view on no further rate changes. I think what's going to be interesting is the discussions at the FOMC. Of course, we just had the press release. We'll hear from Jerome Powell shortly.
But the markets are very interesting. How much focus is there on the fact inflation's come in low? To what extent do they need to see before they actually cut rates? Because we know that there are some expectations of rate cuts priced into the market, about 70% chance of a rate cut.
- And is that for 2019 or for 2020?
- Yeah, over the next year.
- Next year.
- About 70%. So the market's tilted on the fact the Fed may have to cut to ensure inflation on the downside, ensure that it comes back up to target. I think it's something that they would contemplate. The patience suggests that they're not ready to do so, but maybe they're beginning discussions around-- we've heard a couple of Fed members broach it in their speeches about the fact they're going to be watching inflation. If it doesn't pick up, then maybe they do need insurance cuts. So any hint in the FOMC minutes in the coming weeks or from Powell himself shortly would certainly reinforce these expectations built into the market.
- And do you see any changes to the risks for the Fed? Have they changed?
- Well, I think, if anything, I think the economic growth is pretty much coming into play and very much in line with our view of that-- growth has slowed from last year. It was running at about 3%. Q1 came in-- the first quarter came in stronger. We still feel the plane of US growth is around 2%, which is sustainable but still moderate. No surprises there.
Inflation is really the key. And we expect, as does the Fed-- you'll see a firming in inflation, back up to 2%. But we don't get that, then that would be the risk, I think, that we're all waiting to see. And obviously, key data. We'll be watching the inflation numbers as closely as ever and scrutinizing them for any signs of change there.
- And of course, we've also seen tweets from the president about cutting rates, so maybe some political risks there. I don't know if that factors into it as well.
- I doubt it. I don't think so. I think Trump doesn't have much control over the CPI and the inflation data. And that's really what they're looking at here. And what the Fed's done just reflects the global shift in central banks more to this patience and data dependency. But again, it's a neutral stance. They're not saying they're about to cut rates. But clearly, if inflation continues to disappoint, that might enter into the discussions increasingly going forward.
- And finally, what are some of the key US indicators that you're looking at going forward? Of course, we've got the jobs numbers coming out. Anything else that you're looking at?
- Apart from inflation, apart from the FOMC minutes, which we'll be looking at very closely, it's just the standard. Is growth tracking still something a little bit above trend in the second quarter? We likely see growth slow from the first quarter, just based on the fact some of the effects of boosted growth, like inventories, won't be repeated. But are we seeing a continuing improvement in consumer spending? I anticipate we will. Certainly the March data suggests we will. Will that continue? And so that's going to be very important going forward.
- Derek, thank you very much for your time.
- Thank you.