Economics Weekly: The Fed's Second Major Pivot

Friday, January 24, 2020

The unemployment rate has been near half-century lows for well more than a year, and the pace of job gains remains solid. Participation in the labor force by people in their prime working years, ages 25 through 54, has been increasing. And wages have been rising, particularly for lower-paying jobs. People who live and work in low- and middle-income communities tell us that many who have struggled to find work are now finding new opportunities. Employment gains have been broad based across all racial and ethnic groups and all levels of education. These developments underscore for us the importance of sustaining the expansion so that the strong job market reaches more of those left behind. [emphasis added] We expect the job market to remain strong. The median of participants' projections for the unemployment rate remains below 4 percent over the next several years.

[Y]ou have very different structural characteristics in the economy, particularly around inflation. So now, as you can see, inflation is barely moving up, notwithstanding that unemployment is at 50-year lows and expected to remain there. So the need for rate increases is less.... I think we've learned that unemployment can remain at quite low levels for an extended period of time without unwanted upward pressure on inflation [emphasis added]. In fact, we need some upward pressure on inflation to get back to 2 percent. It's quite different in '95 and '98 when there were those two adjustments.

–Chairman Powell, December 11, 2019, post-FOMC press conference

Back in January 2019, following intense market pressure through fourth quarter 2018, Chairman Powell famously conducted an abrupt policy "pivot." This included a radical change to forward guidance, swiftly backed up by three "insurance" rate cuts over the rest of 2019. What has not been acknowledged, however, is that Chairman Powell initiated a second major policy pivot in fourth quarter 2019, which is likely to prove even more profound than the first. As we look toward next week's FOMC meeting, this second pivot is the topic of this Economics Weekly.

For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.

Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.

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