The Fed holds interest rates steady and signals patience on future interest rate hikes. Anthony Okolie talks with James Marple, Senior Economist, TD Bank Group.
As expected, the Fed left rates unchanged. James, what stood out for you?
Well there were quite a few things. We were looking really for three things in the statement to change, and all of them did. So one, the Fed has previously discussed some gradual increases in interest rates. They took out reference to some gradual increases. They had been talking about the balance of risks around their forecasts being balanced. They took that out entirely, and replaced it with patience.
Markets had also been looking for some guidance on the Fed's balance sheet, and whether they would change that. And they put out an additional statement alongside the normal statement saying they are willing to change the balance sheet if necessary. So really on all three fronts, I think, delivered a pretty dovish statement to the market saying that they've recognized sort of the change in sentiment in financial markets, and some of the downside risks to the global economy.
James, I want to pick up on what you just said that the Fed has been stressing the word patience on future rate hikes. How do you interpret it? And did anything happen to make you change your forecast for 2019?
Well, certainly we've heard the Fed chair talk about patience, but it really was something to see that explicitly in the statement. I think it was a really strong signal that the Fed is responding to what they're seeing in financial conditions, and what they're seeing in terms of the slowdown in global growth momentum. In terms of our outlook, one thing I think it's important to stress is we had been expecting growth to decelerate in the United States as fiscal stimulus wears off, and as past interest rate increases start to slow demand.
So in some sense, see a deceleration in economic activity isn't a total surprise. But we, of course, have all these event risks on the horizon that could influence growth. And we've seen some of the momentum in the sentiment indicators slow perhaps a little more than anticipated.
That brings me to my next question. What are the risks to the Fed's outlook right now?
Sure. Well, there's all sorts of event risks we have. Obviously, the China-US trade negotiations. There's Brexit. There are political risks. We just had the shutdown end, but only for maybe 15 days. And if they can't get an agreement, we could see the shutdown on again.
We also have this debt ceiling potential into April. So a lot of event risk. And then, as I said, I think the Fed is looking for signs that the underlying economy is remaining resilient in the face of sort of tightening financial conditions, and we've yet to see sort of which way that's going to go. We don't have any real hard data for how the economy has evolved since we've seen this sort of deterioration.
So I think those are where the risks are. I think at the same time, you look at sort of the labor market and the unemployment rate looks really good, job growth is still holding up, and inflation's pretty close to target. So there's reasons to be optimistic. But certainly, especially those event risks, and probably put the trade one in the highest category because that's where we've really started to see some deterioration to the outlook.
James, thank you very much for your time.