An accommodative monetary policy does not come without costs. The most obvious being the dependency on cheap and abundant debt. Nonfinancial corporate debt as a percentage of GDP is higher today than before the financial crisis. While the credit environment is strong and we aren’t forecasting impending doom, current debt levels instill caution.
While the first quarter of 2019 ended with a sense of optimism that trade negotiations were going well with China, the second quarter was a roller coaster of renewed tensions with Beijing, plus new threats against Mexico (in May, President Trump promised to impose tariffs on Mexico if the country didn’t do more to stem illegal immigration into the U.S.)
It’s been a year since Jerome Powell led his first FOMC meeting as Chairman. Powell’s outlook on the economy at the time was rosy. During the March, 2018 meeting the economic outlook strengthened and the 2019 GDP growth forecast rose from 2.1% to 2.4% with benign inflation expectations. Despite political pressure from the White House, the Fed’s “dot plot” indicated three rate hikes in 2018, three in 2019, and two in 2020.