Chairman Jerome Powell’s frequent assurance that sustaining the US economic expansion is the Federal Reserve’s “overarching” goal is opening the door to potentially aggressive interest-rate cuts.
The timing, size and whether such moves are indeed in his plans may become clearer when Powell and his colleagues meet today and tomorrow in Washington.
While investors are agitating for the Fed to shift, economists don’t see a move this week and are divided on whether officials will cut at all in 2019. The median estimate of Bloomberg’s most recent survey shows a quarter point reduction in December, though it was a close call.
The suspicion of a number of Fed watchers, though, is that the hint of a sustained slowdown would be enough for the Fed to move, and that policy makers will acknowledge that readiness this week. One reason is that the chairman has signalled he’s concerned about how just low rates still are, meaning it may be better to act sooner and avoid a recession than wait and find the economy slumping with the Fed having limited room to act.
Prospects for a shift have mounted in recent weeks as President Donald Trump’s trade war with China has escalated and the US economy had displayed some signs of weakness.
“They will be very reactive if the data even confirms a small amount of slowing,” said Priya Misra, global head of interest rate strategy at TD Securities. “They are going to be more pre-emptive and more aggressive. They will open the door for a rate cut” at the meeting this week.
That perspective of Fed policy has a lot to do with Powell’s perception of risk at a time of high uncertainty and Trump’s dispute with China.
The Fed’s benchmark policy rate has never been this low during a prolonged economic expansion in records going back to the 1950s. That means when the next recession occurs rates will be closer to the zero limit: in effect, US central bankers have less room to cut.
The Fed chairman described the zero boundary as “the preeminent monetary policy challenge of our time, tainting all manner of issues” in a speech in Chicago this month.
Fed watchers read those words as a new trigger point for the central bank. It won’t take an overwhelming confirmation of weakness in data for the Fed to ease, in their view, and a sense that risks are particularly heightened might be enough to prompt a move.
“The bar for precautionary cuts is lower if you are worried about the zero lower bound,” said Michael Gapen, chief US economist at Barclays Plc, which predicts 0.75 percentage points of easing this year, one of the most aggressive calls on Wall Street.
That said, economists are still parsing how much weight the Fed will put on the economic data in hand versus risks and uncertainties, and there isn’t much consensus. Twelve firms expect at least one cut this year, the Bloomberg survey showed, while 12 expect two cuts. Sixteen firms expected no cut at all, and two projected a hike.
“I am hard pressed to figure out what all the fuss is about,” said Ward McCarthy, chief financial economist at Jefferies LLC, who expects rates to remain unchanged this year. “I think the slowdown” in the data now “is the slowdown we are going to get.”
Monthly job growth in 2019 has slowed to an average of 164,000, down from 230,000 in the first five months of 2018. Job openings remain near record highs and consumption is holding up, but concerns over tariffs have hit household confidence. It all paints a picture of an economy that’s down-shifted a bit with inflation below the Fed’s 2% target.
“We see weak inflation impulses,” said Julia Coronado, founder of MacroPolicy Perspectives LLC, who forecasts two rate cuts this year. “It is not like the consumer has rolled over, but you are now seeing a slowing in the pace of growth that makes the economy look more vulnerable to the uncertainties ahead.”
Perhaps the biggest source of uncertainty is Trump. World leaders meet in Osaka for the G20 summit later this month, and investors hope for fresh trade talks between the US and China.
Anything short of a clearly positive reset between Trump and Chinese President Xi Jinping would weigh on business confidence and investment as it could upset supply chains and roil markets. That risks a steeper slowdown in US growth that Fed officials won’t tolerate, warned Barclays economists, who predict a 0.50 percentage point cut as soon as July.
Fed independence will also be on Powell’s mind. Trump has relentlessly attacked the central bank for months for having tightened too far, including a fresh broadside on Friday.
If rates were lowered back to zero, the Fed would have to return to emergency-era policies such as buying bonds, an unpopular measure with lawmakers of both parties.
“In the long wake of the crisis, they just don’t have that much political capital to fall back on. Add to that unprecedented presidential pressure and party polarisation and it gets ugly,” said Mark Spindel, co-author of a recent book about the Fed’s relations with Congress. “They are the only game in town - and they are without deep pockets or ammo” to address the next recession.
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