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October 2018 National Economic Outlook
Stock Market Turmoil and Higher Interest Rates, But U.S. Economy Remains in Good Shape
On Sept. 26 the Federal Open Market Committee raised the federal funds rate by a quarter of a percentage point, to a range of 2.00 to 2.25 percent. The biggest change from the previous statement, on Aug. 1, was the removal of a sentence saying that “the stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.”
That means that many FOMC members now think that the fed funds rate is close to, if not at, the “neutral” rate where monetary policy neither adds to nor subtracts from growth. As the fed funds rate approaches the neutral rate, FOMC members may be more cautious about pushing the rate higher, concerned about making monetary policy contractionary. That being said, the statement and recent Fed speeches indicate that further rate hikes are coming.
The U.S. economy added 134,000 jobs in Sept., below the consensus expectation for an increase of 185,000.
- Hurricane Florence weighed on job growth over the month, with the weakest job growth since Sept. of last year.
- There was a large combined upward revision to job growth in July and Aug. of 87,000.
- The U.S. economy has added an average of 208,000 jobs per month so far in 2018, well above last year’s pace of 182,000.
The unemployment rate fell 0.2 percentage point in Sept. to 3.7 percent; this is the lowest the rate has been since late 1969. The broader U-6 unemployment rate (unemployed, underemployed and too discouraged to look for a job) rose 0.1 percentage point in Sept. to 7.5 percent, but remains near a cyclical low.
After hitting record highs in early Sept., U.S. stock market indices have fallen over the past month. Stock price volatility—up and down movement in prices—has also increased, although only to historically normal levels.
There are a number of reasons for the recent decline in stock prices: higher interest rates, concern about the impact of tariffs on corporate profits, weak earnings reports, political uncertainty ahead of the midterm election, geopolitical concerns, higher labor costs, and profit-taking after strong gains over the past few years.
However, the downturn in stock prices does not mean that a recession is imminent. Although there are a few soft spots, the fundamentals for the U.S. remain solid; consumers, in particular, are in excellent shape, with consumer confidence at an 18-year high.
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