Federal Reserve last month saw a declining risk of recession
WASHINGTON — The Federal Reserve’s policymaking committee saw much less risk of recession at its meeting last month, when it kept interest rates steady after three straight cuts and signaled that it expected to keep low rates unchanged through this year.
Minutes of the December meeting, released Friday, showed that Fed officials favored keeping rates in a low range of 1.5% to 1.75% to cushion the U.S. economy from slow global growth and the Trump administration’s trade conflicts. Officials were also concerned that inflation still hadn’t reached the Fed’s target level of 2%.
Still, many Fed policymakers at the Dec. 10-11 meeting expressed the view that the risks of a U.S.-China trade war had diminished along with the probability of a disruptive Brexit. The meeting occurred two days before the Trump administration and Beijing reached a preliminary trade deal, though press reports had already suggested that an initial agreement was near.
At their meeting last month, Fed officials noted that the U.S. economy was “showing resilience” despite the trade fights and a weak global economy, the minutes said. A rise in long-term rates also “suggested that the likelihood of a recession occurring over the medium term had fallen noticeably in recent months.”
Since last month’s meeting, though, tensions have escalated in the Middle East as the Trump administration has confronted Iranian-backed forces in Iraq. On Friday, stocks sank on Wall Street and oil prices jumped after U.S. forces in Iraq killed a top Iranian general.
Yet many analysts say higher oil prices could potentially benefit the U.S. economy because of the sharp increase in the past decade in U.S. oil production. Higher oil prices encourage energy companies to invest in drilling wells, which boosts demand for steel pipe and other equipment from U.S. factories and creates jobs. Those trends increasingly offset the drag on consumer spending exerted by higher gas prices.
Joe Brusuelas, chief economist at the tax advisory firm RSM, suggested that the risks to the U.S. economy “are, for now, contained.”
“As a result, we do not expect any action by the Federal Reserve,” Brusuelas said. “There would need to be a much greater disruption to oil supply from the Persian Gulf to warrant a rate cut by the Fed in the near term.”
But should Iran respond to the attack and military action escalates, the danger to the U.S. economy could increase, economists said.
“The wild card is whether turmoil in the Middle East triggers a sustained sell-off in equities, depressing business and consumer confidence to the point where labor market and inflation concerns become secondary,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Though the Fed’s policymaking committee voted unanimously last month in favor of keeping rates unchanged, several members voiced concerns about the long-term consequences of very low rates.
Keeping rates ultra-low could fuel excessive risk-taking on Wall Street, a few participants warned, which could lead to dangerous asset bubbles. If those bubbles were to burst, it “could make the next recession more severe than otherwise.”
But a greater number of Fed officials felt that the job market could still strengthen and draw more people off the sidelines into jobs, without sending inflation up too much. That sentiment would favor keeping rates low to further reduce unemployment and stimulate economic growth.
Chairman Jerome Powell echoed that view in the post-meeting news conference, signaling that the Fed was comfortable with keeping rates low for the foreseeable future.
“We have learned that unemployment can remain at quite low levels for an extended period of time without unwanted upward pressure on inflation,” Powell said at the news conference.
Fed officials also expressed concern that Americans’ expectation for future inflation “was too low.”
Inflation expectations, some argue, can become self-fulfilling: If workers expect low inflation, they’re less likely to demand higher pay, which, in turn, allows companies to keep a lid on prices.
Low inflation expectations are another reason for the Fed to keep rates down, in hopes that they will eventually boost inflation.
In comments since the December meeting, Fed officials have remained upbeat about the economy’s prospects.
In remarks titled “Is a Recession Around the Corner,” Thomas Barkin, president of the Federal Reserve Bank of Richmond, said he was concerned about the weakness in business investment, which he attributed to uncertainty caused by factors ranging from rising Middle East tensions to the outcome of trade talks with China. But he said there were reasons to be optimistic, including the benefits of the Fed’s three rate cuts last year.
“While there is always the risk of a shock, the Fed has done a lot to support the economy’s continued expansion and to provide buffers against the downside,” Barkin said in comments to a bankers’ association meeting in Baltimore.