The Federal Reserve left its benchmark interest rate unchanged as expected last week. However, Fed Chairman Jerome Powell made news with some of his most dovish remarks to date – stating flatly that he won’t hike rates again until inflation moves up significantly.
“In order to move rates up, I would want to see inflation that’s persistent and that’s significant,” Powell said at a news conference following the Fed’s announcement.
He would be anticipating “a significant move up in inflation that’s also persistent before raising rates to address inflation concerns.”
He could get his wish in the months ahead as monetary policy, fiscal policy, and the economy all seem to be lining up to push the inflation rate higher. In 2020, inflation may become a front-page problem for the first time in many years.
The government’s release of a blockbuster jobs report this month diminishes the odds of the economy falling into a recession next year. At the same time, it increases the likelihood of inflation rates rising.
It’s not that the economy is at risk of “overheating.” Overall GDP growth is likely to come in moderate at best next year.
Rather, the economy is merely showing signs of sustaining its expansion at a time when fiscal and monetary policy are extremely stimulative.
The U.S. government is now running trillion-dollar budget deficits for the first time since the aftermath of the 2008 financial crisis. It will effectively pump $1 trillion worth of artificial demand back into the economy in 2020.