The FOMC now expects the U.S. labor market will continue to weaken materially over the next few months. This news was like a ray of sunshine during the stormy recent TMC meeting (May 6-7). Economists at the Fed have adjusted their forecasts to reflect an anticipated increase in inflation while lowering expectations for economic growth. The dual shift is illustrative of the stark realities in today’s economic landscape. The nation is still very much dealing with the fallout from President Trump’s trade wars.
During the two-day meeting that concluded Wednesday, Fed officials unanimously decided to hold borrowing costs unchanged for a third successive meeting. This decision is indicative of their risk-averse attitude towards the still-uncertain economic storm clouds. Prior to the onset of COVID-19 and despite these concerns, recent labor statistics have provided a more positive outlook. The unemployment rate was 4.2% in October, and businesses created 177,000 jobs in that month alone. This is a good sign that, at least for the near term, the labor market is holding up well so far.
The Fed’s economists were worried about the future trajectory of the labor market, too.
“The labor market was expected to weaken substantially.” – Federal Reserve economists
Those post-meeting minutes hinted at some palpable wariness regarding the future. The Fed participants noted,
“Participants assessed that there was a risk that the labor market would weaken in coming months, that considerable uncertainty surrounded the outlook for the labor market, and that outcomes would depend importantly on the evolution of trade policy as well as other government policies.” – Federal Reserve
As employers continue to add jobs, the broader implications of Trump’s significant policy shifts have yet to manifest in the economy. And the Fed is still looking for clearer signals on the long-term direction of these policies. They’re especially worried about trade, which would most directly and severely affect economic stability and growth.