Did the Fed pull off a ‘soft landing’ for the US economy?

The United States Federal Reserve on Wednesday held interest rates steady and signalled borrowing costs are likely to remain unchanged indefinitely, with moderate economic growth and low unemployment expected to continue through next year’s presidential election.

“Our economic outlook remains a favourable one, despite global developments and ongoing risks,” Fed Chair Jerome Powell said in a news conference following the US central bank’s decision to leave its benchmark overnight lending rate in its current target range between 1.50 percent and 1.75 percent.

“We believe monetary policy is well-positioned to serve the American people by supporting continued economic growth, a strong job market and inflation near our 2 percent goal,” Powell said.

New economic projections released by the Fed showed a solid majority of 13 of 17 policymakers foresee no change in interest rates until at least 2021. The other four saw a single rate hike next year, a view at odds with investors’ expectations for a single rate cut.

Notably, no policymakers suggested lower rates would be appropriate next year, a sign the Fed feels it has engineered a so-called “soft landing” for the US economy after a volatile year in which US bond market flashed warning signs of recession and trade spats disrupted supply chains and markets.

Still, the Fed noted, global risks warrant monitoring in the midst of a continuing US-China trade war, and inflation remains muted.

And given that inflation is lower than the Fed wants despite unemployment near a 50-year low, the handful of policymakers expecting higher rates may find it a hard sell.

Overall, policymakers see the unemployment rate, currently 3.5 percent, staying below their estimate of a sustainable level in the long run for another three years, even as most expect inflation by then to end up at, or just a little above, the 2 percent target, the new projections showed.

“I think we’ve learned that unemployment can remain at quite low levels for an extended period of time without unwarranted upward pressure on inflation,” Powell said.

Compared with the 1990s, he said, when the Fed cut rates as an insurance policy against a recession and then raised them again to prevent a tight labour market from fueling unwanted price rises, today “the need for rate increases is less.”

Indeed, the projections also showed policymakers as a group expect interest rates to remain accommodative – that is, below the 2.5 percent they estimate neither stimulates nor restricts economic growth – through at least 2022.

US stocks rallied modestly after the decision, which had been widely anticipated by investors. The benchmark S&P 500 index, which was largely flat when the Fed announced its policy decision, closed up about 0.3 percent.

There were no dissents to the policy statement, the first without opposition since the April 30-May 1 meeting.

Little obvious political fodder

After the Fed’s October policy meeting, Powell said it would take a “material” change in the economic outlook for the central bank to change rates again, language he repeated on Wednesday, but did not elaborate on.

The Fed cut rates three times this year, including in October, “strong measures” that Powell said will take some time to fully show up in the economy.

The quarterly economic projections released on Wednesday showed little change from those in September, as policymakers sketched out an economy they feel has skirted recession risks and is poised to grow close to trend for several more years.

A reference in the October policy statement to “uncertainties” about the economic outlook was dropped on Wednesday.

The US economy at the median is projected to grow 2 percent next year and 1.9 percent in 2021.

Unemployment is seen staying at its current level of 3.5 percent through next year, rising to 3.6 percent in 2021.

In a demonstration of the disconnect between that low level of unemployment and inflation, the pace of prices increases is expected to rise only to 1.9 percent next year.

The economy will be a central issue in US President Donald Trump‘s reelection campaign against a Democratic challenger likely to call for different economic policies. Trump has repeatedly criticized the Fed this year for not cutting rates faster and deeper.

The Fed’s forecasts offered little obvious fodder for either of the major political parties, with the economy largely seen performing as it has – far short of the 3 percent annual growth Trump promised to produce, but also with historically low rates of unemployment.