Recession? The Fed says no.

When I wrote the Sight|Lines: Recession? Not so fast, I didn’t expect to be writing a series called “Recession? …”  But the Federal Reserve (the Fed) held its September Federal Open Market Committee meeting recently, and, in short, the Fed is not forecasting a recession any time soon.  The Fed cut its benchmark interest rate, the fed funds rate, by 0.25%, which was in line with expectations.  It revised its economic outlook modestly higher, shared its dot plot forecast of future fed funds rates, and reinforced that it will be data dependent, meaning it will adjust monetary policy in response to evolving conditions.

In this Sight|Lines, we provide more detail about the Fed’s decision and outlook.

Fed Statement

Figure 1 shares the Fed’s statement, showing changes, or the lack thereof, from the July statement.  The Fed still characterizes the labor market as “strong” and economic activity as “rising at a moderate rate.”  It observes that consumer spending is rising at a “strong pace” and that business investment has “weakened.”  For the first time, the Fed also added a reference to weak exports.  Despite some of the uncertainties related to its outlook the Fed still expects a “sustained expansion of economic activity.”  There is no mention of a looming recession in the Fed statement.

The Dot Plot

The Fed’s dot plot (Figure 2) is a graphic showing each Fed official’s forecast of the fed funds rate over the coming years. This is telling, as we learn from this chart that the median outlook is for rates to remain at their current level into 2020 and rise in both 2021 and 2022.  Now we do see that there is a range of views, with some “dots” plotted higher, some lower, and some even with current levels.  An important point: No Fed official has projected a fed funds rate to be more than 0.25% lower from here in the forecast period through 2022.  The information in the dot plot, taken together, is consistent with an outlook for economic growth.

The Summary of Economic Projections

The Fed is publishing its Summary of Economic Projections four times in 2019, including at this September meeting. Looking at this summary, we see the Fed raised its real GDP growth forecast for 2019 from 2.1% to 2.2%.  It adjusted its 2019 unemployment forecast from 3.6% to 3.7%, still a very low number.  The Fed’s inflation outlook remains unchanged, which shows inflation rising to 1.9% in 2020 and then to the target 2% level in 2021.  The summary also presents a fed funds forecast that shows the rate level from here.  From the Summary of Economic Projections: The Fed is not forecasting a recession during the forecast range of 2019-2022.

Chairman Powell’s Press Conference

After each meeting, the Fed chair holds a press conference that begins with a prepared opening statement, and then opens up to questions from the media on the Fed’s decision and outlook.  Naturally, we can learn more about the Fed’s thinking from this Q&A, as the chair has the opportunity to put the Fed’s decision and forecasts in context, providing a little more detail on its views.  Three things we learned from the press conference: First, the Fed’s outlook is positive; second, it still considers trade uncertainty a key issue; and third, it will remain data dependent, meaning it will adjust policy as the environment changes.  There was no mention of a looming recession during the press conference.

Conclusion

Fed policy, by its nature, is continuously evolving.  The central bank monitors the economy, especially employment, inflation, and economic growth, and adjusts policy in support of all three.  So what did we learn from the September meeting?  The Fed has cut rates in support of the growing economy and sees no recession any time soon.

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