Experts Weigh In On Cuts To Federal Reserve Growth Projections

The U.S. Federal Reserve joined the central banks of Europe, China and elsewhere last week in cutting 2019 economic growth projections. The Fed is now calling for 2.1-percent growth this year, down from its previous projection of 2.3 percent.

Trump’s Targets

In 2018, the U.S. registered 2.9-percent GDP growth, its highest growth number since 2005. Yet President Donald Trump has been unable to approach the ambitious economic growth targets he set prior to his election.

“We're bringing it (the GDP) from 1 percent up to 4 percent. And I actually think we can go higher than 4 percent. I think you can go to 5 percent or 6 percent,” Trump said in a debate back in 2016.

So far in his presidency, annual GDP growth has been 2.3 percent in 2017, 2.9 percent in 2018 and a projected 2.1 percent in 2019.

While Trump’s critics are quick to point out that he has not followed through on his goal of 4-percent growth, supporters point out that the U.S. has not recorded three consecutive years of at least 2 percent GDP growth since the period of 2004 to 2006.

See Also: Fed Says No Rate Hikes In 2019

Fed Turns Dovish

Despite growth projections falling, the Federal Reserve also said it plans to remove one major economic headwind from the equation in 2019: the Federal Open Market Committee said last week there will be no more interest rate hikes in 2019.

The bond market seems to be taking the easing one step further. A month ago, bond investors were pricing in an 86.6-percent chance interest rates would remain at or above their current target range, according to CME Group. Today, the bond market is pricing in a 65-percent chance of at least one 2019 rate cut.

The Fed itself also became decidedly more dovish on its interest rate outlook. It said 2019 inflation rates will average 1.8 percent, down from previous estimates of 1.9 percent and below its 2-percent target. The new estimated unemployment rate is 3.7 percent, up from 3.5 percent in December.

The FOMC’s lower expectations are clearly reflected by a major shift in its “dot plot” chart as well. In December, 11 of the 17 members predicted two rate hikes this year, with only two members forecasting no hike at all. Last week, that balance reversed, with 11 members calling for no 2019 hikes and just two calling for multiple hikes.

See Also: 2018 US GDP Growth Highest Since 2005

Expert Takes

Even Wall Street insiders have been surprised at how quickly the Fed has shifted gears.

“That tells me that they are concerned about growth. When things come in unexpected, that leads to volatility,” TD Ameritrade retail trading senior specialist Alex Coffey told Benzinga.

“To me the surprise was seeing how quickly they went from two to three rate hikes this year to being this dovish in just a three-month period.”

David Russell, vice president at TradeStation Securities, said the Fed’s aggressive shift in outlook has created uncertainty in the market.

“I think the Fed has changed course more rapidly than anyone could have imagined. This is an example of the Fed hurting its credibility, and now we're at a point where nobody knows what to expect,” he told Benzinga.

Uncertainty is always bad news for investors. For the first time since 2007, the yield on the 10-year Treasury note fell below the yield on three-month Treasury bills briefly last Friday.

Yield curve inversion has historically been a reliable leading indicator of an economic recession.

Photo by AgnosticPreachersKid/Wikimedia.