Weekly Economic Update: April 1st, 2019
• At the end of the Fed’s policy meeting, the FOMC announced that there would be no changes in the fed funds rate for 2019. The reduction to zero fed fund increases followed the expectations of two fed fund increases announced in December. The reduction to zero increases surprised the markets as most economists expected a lowering to one increase in 2019.
• The equity market finished the quarter with one of it’s best gains in years. Much of the reported gains in Q1 were nothing more than a rebound from the significant sell-off registered during Q4 2018. Nevertheless, the performance of the equity market is a forward-looking indicator, and the recent strength is pointing toward a stronger economy while the bond market is expressing concerns that economic strength is waning.
• The bond market is pricing in an eventual fed ease as the two-year note is trading at a lower yield than the current fed funds range of 2.25% to 2.50%. Real consumption in the economy has seen some bounce since the weak December numbers but will need to show considerable strength in Q2-Q3 to persuade the Fed to consider raising rates one more time in 2019.
• The Fed’s favorite inflation gauge, Personal Consumption Expenditures (PCE), slipped to 1.8% in December which is below the Fed’s target of 2%. The current soft patch in economic activity should show some rebound in Q2 with slightly higher PCE data. Growth in housing and consumer spending could keep the Fed on hold for the remainder of 2019. The Fed is currently on the sidelines but will not stay there if they see any additional weakness in the economy.