Assessing the US monetary policy stance and its impact on growth.

The main outcome of the October’s Fed meeting is that the recent series of rate cuts will be stopped or at least paused. We present a quick assessment of the second and third claims, using the Fed’s main macroeconometric model. We find that growth over the next year will be heavily reliant on low rates and that the current level of the real 10 year Treasury rate does not appear overly accommodative.

Highlights:

  • The main outcome of the October’s Fed meeting is that the recent series of rate cuts will be stopped or at least paused.
  • The decision had three main motivations and assumptions: i) the policy uncertainty capping investment growth will fade, ii) growth is and will remain solid, thanks also to the gradual feeding though of the three rate cuts enacted in 2019, iii) financial conditions are overall loose.
  • We present a quick assessment of the second and third claims, using the Fed’s main macroeconometric model. We find that growth over the next year will be heavily reliant on low rates and that the current level of the real 10 year Treasury rate does not appear overly accommodative.
  • We therefore think that all this will keep the Fed’s attitude tilted towards further easing. The expected further slowdown in growth during H1 2020 will then trigger further rate cuts.
  • A key trigger for Fed action is likely to be employment growth. Despite October’s better than expected results, payroll growth is sliding

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ASSESSING THE US MONETARY POLICY STANCE AND ITS IMPACT ON GROWTH.

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