With election on horizon, political pressure may increase on the Fed

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As the Federal Open Market Committee convenes for its final scheduled meeting this year, one where President Trump kept upping the political pressure, the specter of the 2020 elections may make the situation worse.

“The upcoming elections mean that the Fed might well face even greater political pressures in 2020,” said Peter Ireland, an economics professor at Boston College and a member of the Shadow Open Market Committee. “The elections provide another reason for thinking that, unless the outlook changes dramatically, the Fed is going to be on hold for awhile — probably for most of the next year, in fact.”

To avoid the appearance of political motivations, Ireland suggested the FOMC conduct policy “with reference to a specific rule: they could use the rule to explain that their interest rate adjustments are made in a consistent way in response to changes in the outlook for inflation and unemployment, independent of politics.” He explains this further in a recent Bond Buyer podcast.

The elections could mean the Fed will be patient, but that could change should circumstances warrant. “The Fed will attempt to remain on hold, but if trade negotiations deteriorate or the U.S. economy begins to slow more than expected, there could be additional rate cuts in the first half of 2020,” Luis Alvarado, Wells Fargo Investment Institute investment strategy analyst, said in a note. Additionally, he sees the Fed balance sheet expanding.

“If needed, we expect the Fed to be more proactive in the first half of the year, but to be on hold as the election period draws near,” he added. He believes the Fed has avoided politics despite the president’s many verbal and written jabs.

Still, with no change in rates expected, the new Summary of Economic Projections, or dot plot, will draw the market’s attention.

“How the Fed projects economic growth, inflation and unemployment relative to what they had projected in September’s release will reveal a lot about their thinking of where the economy is now, the effect they see the three interest rate cuts this year having on the economy, and where they see the economy headed in 2020,” said Greg McBride, chief financial analyst, at Bankrate.com.

“Expect a dot plot and interest rate projection that is considerably flatter, with more consensus around the idea that interest rates are at the appropriate level. The Fed is on the sidelines and any further action projected will need to be consistent with their growth and inflation forecasts.”

“Threats of a trade war, a government shutdown and a tone-deaf Federal Reserve brought the economy to the brink of recession a year ago,” Diane Swonk, chief economist at Grant Thornton, said in a note. “The question is whether we can avert it again. The Fed has done its part by admitting its mistakes and reversing three of four rate hikes in 2019.”

But the bottom line is trade will dominate the headlines. “The administration’s trade policies have left little room to maneuver,” Swonk writes. “Either the president backs off his campaign promises, holds the line on tariffs and the economy slows. Or, he risks a recession by doubling down on trade wars and heightening uncertainty.”

This will be the last meeting where St. Louis’ James Bullard, Chicago’s Charles Evans, Kansas City’s Esther George, and Boston’s Eric Rosengren are voters. In 2020, they will be rotated out of voting spots and replaced by Cleveland’s Loretta Mester, Philadelphia’s Patrick Harker, Dallas’ Robert Kaplan and Minneapolis’ Neel kashkari.

Economic data
The Conference Board reported the Employment Trends Index rose to 110.18 in November from 109.96 in October. The index is up 0.1% in the past 12 months.

The rise suggests “solid job growth will continue in the coming months,” said Gad Levanon, head of the think tank Labor Market Institute. “Recently published indicators held on better than expected, suggesting that businesses are less cautious than expected and that economic growth will remain solid, despite a very tight labor market and declining corporate profits.”

Separately, consumers’ expectations of inflation rose in November, as the three-year inflation expectation gained to 2.5% from 2.4%, while the one year rose incrementally to 2.4%, according to the Federal Reserve Bank of New York.

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