Degroof Petercam: US economy - slower growth on the horizon

• That said, the fading of the fiscal stimulus, the lagged effects of earlier rate hikes and a weaker external environment in combination with the strong USD suggest that growth will weaken from here.

• Headline inflation will decrease substantially in the first half of 2019 while core inflationary pressures continue to hover around the Fed’s 2% target.

• The combination of lower anticipated future activity, modest inflation and volatility in financial markets has caused the Fed to become more cautious. In fact, over the last few months the Fed has taken a remarkable U-turn towards more ‘patience’.

• Mr. Powell pointed to several factors including the recent volatility in financial markets, the uncertain impact of the government shutdown, trade negotiations and the continued weakening of global economic activity.

• The Fed also provided more guidance on its balance sheet. While the Fed has reiterated that it doesn’t see the balance sheet as ‘an active policy tool’, Mr. Powell stressed that the Fed wouldn’t hesitate to adjust the run-down process if needed. In any case, its balance sheet looks set to remain very large in historical perspective.

• Meanwhile, a couple of issues remain unresolved. Trade negotiations start up again after the Chinese New Year Holiday and attention has shifted back to the possibility of a renewed government shutdown. From March on, the debt ceiling looks set to become the next political hurdle.

Download the full macro economic update.