The U.S. economy last month set a national record for the length of an economic expansion. Currently, the unemployment rate is a low 3.7%, and the number of job openings exceeds the number of unemployed persons by about 25%. Average wage rates have been gradually moving up, recently at a pace that is about a percentage point faster than consumer price inflation. A wage-price spiral is not at hand, but various trend measures of annual consumer price inflation are above 2%. Second-quarter real GDP growth will come in below first-quarter growth. However, that will be largely due to a swing in inventories. Second-quarter growth in real final sales to domestic purchasers appears likely to have been in the range of 2.5 to 3%, or nearly double the first quarter’s growth.

At present, the Federal Reserve (Fed) maintains a target range for the federal funds rate of 2.25 to 2.5%. History would suggest that the Fed should continue its recent policy path, gradually tightening monetary conditions by raising its target rate. So what do financial-market participants think the Fed will do at its July 30-31 meeting? Recent interest rate futures prices place an implied probability of about 90% on two or more interest rate cuts before yearend, a 60% probability of 3 or more cuts, and a 20% probability of 4 or more. Judging from the minutes of the Fed’s latest monetary policy meeting and its formal post-meeting statement, Fed policymakers have become considerably more amenable to a rate cut. The icing on the cake came in early July when Fed Chairman Jerome Powell strongly hinted during congressional testimony that a rate cut could be forthcoming shortly.

The Fed’s rationale for a shift toward a more dovish stance is the risk that uncertainties related to foreign growth, international trade, low inflation, and the federal debt ceiling (which could be hit in September) could yet cause a serious impediment to economic growth, and that a near-term easing of monetary conditions could be a form of insurance against that risk. In AMG’s view, however, global growth is already at or near bottom, U.S. economic expansion will sustain a reasonable growth trend (about 2% near term), wage growth will continue to accelerate, and inflation will not stall out below 2%. An easier monetary policy in 2019 is not needed and, if implemented, will probably be reversed in 2020.

Related Articles

See All

Fed Risks Recession When Cleaning Up Sticky Inflation

March 23, 2023
45 min watch / 2 min read
Brief: Wealth Management, Global Economy, Financial Markets & Investing, Alternative Investments
Read More

Kremlin vs. Kyiv: Impact on the Global Economy Weakens

March 7, 2023
5 min read
Brief: Global Economy
Read More

Notes on the Economy – Q1 2023 Summary

March 2, 2023
3 min read
Brief: Financial Markets & Investing, Wealth Management, Global Economy
Read More

Get the latest in Research & Insights

Sign up to receive a weekly email summary of new articles posted to AMG Research & Insights.