Last December, the Federal Reserve raised interest rates for the ninth time in four years and suggested that further increases were likely. So much for forward guidance. This year, the Fed has cut rates three times, reduced its long-term rate expectations, and ceased its balance sheet runoff. The Fed’s decisions were blamed for contributing to a yield curve inversion and then credited for reversing it.

All this occurred despite a year of good economic growth, low unemployment and stable inflation. The Fed justified its retreat as a “midcycle adjustment” that aimed to address downside risks created by global trade tensions. That done, now is a good time to pause and take stock of where conditions stand. Here is our take on where things stand, and where things might go from here.

Weekly Economic Commentary - 12/06/19 - Chart 1

It bears noting that U.S. economic activity has been sustained in spite of fading support from the 2017 tax reform bill. That measure appears to have created some short-term stimulus, but little lasting impact on potential growth.

The greatest challenge for the Fed this year has been adapting to a new era of trade restrictions and retaliations, problems that monetary policy may not be well-suited to offset. Nonetheless, the Fed’s dual mandate requires it to make the attempt.

Throughout the year, the Fed’s press releases and commentary indicated it would “act as appropriate to sustain the expansion,” and the removal of that phrase from the October post-meeting statement was a signal that rate cuts would cease. We don’t expect a resumption anytime soon.

Weekly Economic Commentary - 12/06/19 - Chart 2

Weekly Economic Commentary - 12/06/19 - Chart 3