Data Show Still Solid, but Moderating, Momentum in Q4
- Despite some softer-than-expected data in recent weeks and continued volatility in the financial markets, the FOMC raised the fed funds rate 25 bps at its policy meeting on Wednesday.
- If, as we expect, growth remains solid in coming months, then we think our outlook for future rate hikes, albeit at a slower pace, remains reasonable.
- Economic data out the gate this week generally supports the still solid, yet moderating, pace of growth. Personal income and spending data showed consumer spending continues to rise, while fresh housing data suggest some modest improvement to end an otherwise year of cooling.
Data Show Still Solid, but Moderating Momentum in Q4
It was only a few weeks ago that there was nearly a universal agreement among analysts that the Federal Open Market Committee (FOMC) would hike rates at its December 19 monetary policy meeting. But softer-than-expected data in recent weeks and volatility in financial markets led some analysts to expect that the FOMC might refrain from tightening. Stocks had rallied just before the Fed’s decision was released on Wednesday, but, as we expected, the FOMC raised the fed funds rate 25 bps. The Fed has now hiked rates 225 bps over the past three years, 100 bps of which have occurred in 2018.
The FOMC is attempting to move away from a pre-determined policy path. It sees balanced risks to the economic and inflation outlook, and reaffirmed its data-dependent approach in the policy statement. The FOMC also dialed back its assessment for future tightening while recognizing some moderation in growth by reducing its GDP growth forecast. But, the recent policy decision to raise rates and continue its trajectory for quantitative tightening has left many analysts and market participants worried. Analysts have been questioning whether the Fed might make a policy mistake or if markets are purely overreacting. For now, we all must wait and see how the economy evolves over the next year or so. If, as we expect, growth remains solid in the coming months, then we think that the outlook for future rate hikes, albeit at a slower pace, remains reasonable. We expect the Fed to hike rates 50 bps in 2019 (chart on first page).
Economic data out the gate generally support a still solid, yet moderating, pace of growth. Personal income and spending data showed consumer spending continuing to rise at a steady rate. A sturdy consumer backdrop points to solid growth in Q4 consumption, and despite increasing interest rates November’s release showed some newfound strength in durable goods spending (top chart). Steady gains in the hard data helped keep the University of Michigan’s measure of consumer sentiment elevated in December. This is despite worries of extended drops in financial markets and softness in the housing sector. Durable goods orders rose in November, but core orders have slowed recently (middle chart). Core orders reaffirm our view that the pace of equipment spending is likely to slow in 2019 due to slower global growth and trade tensions starting to weigh on U.S. activity.
The housing sector has been a laggard of late, but fresh November data suggests some modest improvement. Housing starts jumped a bette