From the FXWW Chatroom: Economic developments through the first five months of the year have largely unfolded as we had anticipated. In turn, we have made only minor tweaks to our forecast profiles for real GDP growth, unemployment and inflation. Our Fed view is unchanged.
-The April retail sales data provided preliminary evidence that the soft patch in Q1 consumer spending is fading. While the recent rise in energy prices somewhat diminishes the tailwinds from the tax cuts, further labor market strengthening should support healthy consumption gains over the next several quarters. Meanwhile, although financial conditions have slipped, they continue to support growth.
-We continue to expect the Fed to hike three more times this year and four times in 2019, bringing the terminal fed funds rate to 3.4%. This is consistent with what we see as meaningfully more tightening in the labor market and a greater overshoot of the Fed’s inflation target relative to the Fed’s median forecast.
-The Fed could indicate a fourth hike this year as soon as the June 13 FOMC meeting. While this may not necessarily bring forward the expected path of tightening over the entire forecast horizon just yet, at minimum the Fed should change their statement language to indicate they no longer expect the fed funds rate to remain accommodative by yearend.
-As we look further down the road, the risks of a mild recession have risen somewhat as the Fed will likely have to hike through the neutral rate in order to prevent the economy from overheating. A fading fiscal impulse in 2020 magnifies this risk. We have lowered our 2020 growth forecast by two-tenths to 1.3% (Q4-over-Q4) as a result.
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