Our proprietary Astor Economic Index® is still showing strong growth in the US economy. The index is currently at the bottom of a fairly narrow range it has been in during 2018. The economy has thus far proved itself resilient to escalating trade tensions and steadily rising interest rates.
Has the Fed shifted
According to their statement from the September FOMC meeting, the Federal Reserve no longer considers its monetary policy stance accommodative. Supplemented by speeches since the meeting I interpret this shift as confirming the Fed’s view rather than signaling a new path.
I see two facets to this recognition. First, the rate is within the error range of neutral. The neutral level of interest rates (where policy is never adding stimulus nor constraining growth) is imprecisely measured and we never really know where it is. The Fed no longer thinks it is deliberately boosting economic output with simulative rates. Second, as argued by Tim Duy, the era of forward guidance is over and its back to the old days of the Fed waiting to see how the data evolves before deciding on monetary policy. We used to call this “Fed Watching” as opposed to what participants have been able to do the last several years which amounted to “reading the forward guidance.”
The shift away from forward guidance is potentially bearish, as some had thought that the concept of a specifically neutral rate would give the Fed a chance to pause its hiking. By moving away from framing rates as specifically accommodative, neutral or restrictive the Fed has increased the chance of continuing to raise rates should the economy continue to grow above the sustainable rate.
How is the Fed doing with regard to its Inflation target? Inflation is quite close to the Fed’s goal of 2% year on year as measured by the Personal Consumption Expenditures price index, which allows better for the fact that consumers change what they buy in response to changing prices. The chart below shows the Fed’s preferred measure in blue along with the more familiar CPI in red. Both of these indexes are showing year on year changes at or near the highs of the current recovery, but that should not alarm you. The Fed has been trying to get PCE closer to its target for years. Now, from their standpoint, the challenge is to keep it here and not let it be much above the target for too long. Of course, only the committee members know what “to much above” or “too long” means.
Importantly, the FOMC sees rates continuing to rise next year even as the rate of GDP growth attenuates. My interpretation of this is that market participants should not assume the rate hikes are done based on a quarter or two of modestly disappointing growth, they have already taken a regression to the mean into account
The labor market continues to impress
Despite a slightly lower headline payroll gain, large revisions and storm-related distortions mean the strong labor market continues to suggest the current recover is not running out of steam. Of course, given the very large fiscal stimulus passed in the winter, one might wonder why the economy is not even stronger. Wages are posting solid year over year gains but are not showing signs of leading to sharp inflationary pressure.
As always, we at Astor will be monitoring the economy closely to inform our investment decisions. To see more of our weekly collection of charts, visit www.astorim.com/charts or download the Astor Economic Research App from the App Store or Google Play.
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The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.