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Change in the rate call: FOMC on hold until 2020
Rising trade tensions, downward revisions to estimates of inflation in recent quarters, which is now running more substantially below the Fed's 2% target, and a less favorable financial backdrop to the forecast tied to concerns over trade policy suggest that the Fed's "patient approach" to policy is likely to continue for longer than previously anticipated.
We now expect the next adjustment to the Fed interest rate policy will occur mid-2020, later than our previous forecast of late-2019. We anticipate the Fed will keep the target for the federal funds rate at its current setting of a range of 2¼% to 2½% for approximately another year and raise the funds rate target by a quarter point, to a range of 2½% to 2¾%, in mid-2020. At that point we expect that the trend in core inflation (for personal consumption expenditures; PCE) will have firmed to slightly above 2%. We expect GDP growth to average close to potential, approximately 2%, over the next 1 to 2 years, and that labor markets will continue to exhibit broad strength, contributing to an environment where a modest upward adjustment to the Fed interest rate target would be appropriate to balance the risks of promoting continued expansion and stable inflation expectations, on the one hand, and avoiding overheating and the need for a sharper upward adjustment to interest rates in the future, on the other.
The Bureau of Economic Analysis revised down its estimates for both overall and core PCE inflation in the first quarter to 0.4% and 1.0%, respectively (quarterly changes at annual rates). We expect that core inflation will firm in response to tight labor markets and consistent with inflation expectations near 2%. Nevertheless, subdued readings on inflation in recent quarters suggest that core inflation could rise toward 2% later than previously anticipated, an important factor in the decision to push back the date of the next Fed rate hike in our forecast. A strengthening dollar has contributed to a more subdued outlook for inflation.
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