Context is key
US unemployment currently stands at a rate of 3.5%. This is the lowest since 1969 and well below the long-term average of 5.9% (average since 1950). In other words, the employment situation is about as healthy as it gets. More context: the latest quarterly real GDP number has just been released, revealing growth at an annualised rate of 1.9%. This is slightly better than expectations. Should the Fed be disappointed with the growth rate? Hardly. Its own forecast suggests the long-term trend GDP path is now around 1.8%. The IMF expects 2.1% in 2020 and then gradually subsiding to 1.6% in 2024.
So, we just don’t get it. Why reduce rates to extraordinarily low levels when everything is chugging along OK? The gap between 1.5% and 0.25% or even zero is not very great, so the Fed has little firepower next time it really needs it – and yes, it is inevitable it will need it, as many of the issues surrounding the “Great Recession” remain unresolved. Of course, the same “lack of firepower” comment can be made of many other central banks – the European Central Bank and the Bank of Japan spring readily to mind.