As we close the ledger on another year, most signals point to purring, if not motor-revving, economy. The Federal Reserve’s fourth rate hike in 12 months on December 16 indicates the central bank is confident the market will continue to its smooth ride.
A third straight month (September through November) of a 3.7 percent unemployment rate offers further evidence that the United States’ nearly decade-long recovery should continue for the near future. According to the Bureau of Labor Statistics, the country added 155,000 non-farm jobs in November. Remarkably, when just about every American who wants a job has one, consumer prices have remained quite steady. Despite President Trump’s criticisms the Fed seemingly has accomplished its twin mandates of low inflation and high employment. And while low unemployment forces manufacturing, healthcare, technology, construction, and other industries to look harder for qualified candidates to fill jobs, there is no question that it is good for the economy as a whole.
Still, the Federal Reserve committee acknowledged some “softening” of the economy. The 155,000 new jobs created in November is somewhat lower than the 200,000-plus created during the average month in 2018. The stock market has nosedived in the last several weeks and turned negative for the year. December’s rate hike is designed partly to make borrowing more expensive, and tap the breaks on consumer spending that if left unchecked could provoke inflation. Of course, low interest rates also provide incentive for businesses expand operations and hire more people. However, unemployment appears to have bottomed out. There aren’t many people left to hire, anyway, so the rate increase should have little effect on that front.
The Fed’s primary responsibility is to keep the economy humming along with steady, sustainable growth. Since the Great Recession peaked in the middle of 2009, the U.S. has enjoyed one of the longest bull runs in history. Most of that stretch was just like the central bank likes it – slow and consistent, with gross domestic product climbing around 2.3 percent every year. But the economy shifted gears in 2018, accelerating to 3.1 percent growth and sparking inflation concerns. Price increases have not yet manifest themselves, perhaps as a result of Fed Chairman Jerome Powell and his fellow committee members’ regular rate increases. Their December message stated that a couple more hikes in the next year ought to be enough to keep the economy on the fast (but not too fast) track
Other indicators show the economy moving steadily ahead and both consumers and businesses remaining optimistic. According to the Bureau of Economic Analysis, Americans continued to spend during the third quarter of 2018 – indicating job security and expected prosperity. Businesses also prepared for more good times ahead by stocking up on wholesale and manufacturing inventories in anticipation of continued strong sales.
Given these strong indicators, an unemployment rate well below the 6.7 percent the Federal Reserve has historically sought, and core inflation hovering around the historically ideal 2 percent, the economy seems well fortified to absorb the latest interest rate hike. Expect to see a couple more rate increases in 2019 as the Fed works to keep inflation in its lane and the economy from overheating.