FEDERAL RESERVE Chairman Jerome Powell and his colleagues look primed to cut interest rates by a quarter percentage point later this month, eschewing a bigger move in what would be their first reduction in borrowing costs in more than a decade.
Faced with slow global economic growth and elevated trade tensions, the policy makers are also likely to leave open the possibility of further cuts down the road as they seek to sustain the record-long US economic expansion.
“I’d like to go 25 basis points at the upcoming meeting,” St. Louis Fed President James Bullard, a 2019 voter and one of the central bank’s most dovish policy makers, told reporters Friday. Bullard characterized such a move as a recalibration, rather than kicking off multiple cuts.
“I think easing cycle is a little bit strong for this situation,” he said, instead citing episodes in the 1990s when the Fed made downward adjustments in the policy rate to take out insurance against external shocks and keep the economy growing.
Investors are fully pricing a quarter-point cut at the July 30-31 Federal Open Market Committee (FOMC) meeting. But they scaled back bets for a half-point reduction after the New York Fed took the unusual step of walking back comments made on Thursday by its president, John Williams, that were interpreted as a call for a more aggressive policy move.
The action convulsed financial markets in Asia, and President Donald Trump waded into the confusion Friday with tweets that renewed his criticism of the central bank for having raised rates in the past, while saying he agreed with Williams’s first comments “100%.”
Expectations for a rate cut had already been clearly signaled by Powell during congressional testimony on July 10 and 11, where he discussed the uncertainties stemming from Trump’s trade policies and slowing global growth.
Speculation for a more muscular half-point move grew after Williams spoke at an academic conference about the benefits of acting swiftly when rates are already near zero. His prepared remarks didn’t discuss the current economic outlook but the context — the Fed’s target range for its policy rate is 2.25% to 2.5% — caught people’s attention. The message appeared to be reinforced a short while later by Fed Vice Chairman Richard Clarida.
“You don’t need to wait until things get so bad to have a dramatic series of rate cuts,” Clarida, a Trump appointee, told Fox Business Network. “We need to make a decision based on where we think the economy may be heading.
Stock and bond prices rose and the dollar fell as investors absorbed the comments from Powell’s top two lieutenants, who spoke within an hour of each other on Thursday afternoon, and then sharply reversed some of those moves after a New York Fed spokeswoman issued a statement several hours later to stress that Williams speech “was not about potential policy actions at the upcoming FOMC meeting.”
The messaging confusion was widely criticized by Fed watchers.
“Fed communications could have been a lot better and more linear, just to put it mildly,” said Roberto Perli, a partner at the research firm Cornerstone Macro LLC.
Michelle Meyer, US economist at Bank of America, called it “a debacle in communication” and stuck with a call for a quarter-point cut. Economists at LH Meyer Inc. changed their call to half-point cut, then went back to a quarter-point after the clarification. The Washington-based research firm’s founder, former Fed Governor Laurence Meyer, said former Chairman Alan Greenspan would have had his head, had he moved markets like that.
For all the tumult, Powell’s been clear as he’s led a move toward easier policy after the four 2018 rate hikes. At his June press conference he said the case for “somewhat more accommodative policy’’ had strengthened in the view of “many’’ on the FOMC. He repeated the “somewhat more’’ phrasing at a speech in Paris on July 16.
The case for a modest move — versus a more aggressive cut, or doing nothing at all — has a lot to do with still-resilient US economic data, as well as divisions among policy makers on the committee.
US non-farm payrolls increased a robust 224,000 in June, retail sales data showed that consumer spending remains strong, and overall financial conditions have eased up despite rising global risks and tensions — in part because the Fed has signaled that it’s tacking toward easier policy.
SOME OPPOSE CUTS
Thomas Barkin and Raphael Bostic, presidents of the Richmond and Atlanta reserve banks, respectively, have suggested they see little need for a rate cut just now with the economy performing well even amid rising uncertainty. Neither are FOMC voters this year. But Boston Fed President Eric Rosengren is a voter, and on Friday he sounded steadfastly against a reduction in rates.
“As long as the economy’s doing well, if that continues we don’t need accommodation,” Rosengren told CNBC, citing encouraging comments over trade between the US and China at the Group of 20 meeting in Osaka, Japan, in late June, as well as encouraging US economic data.
“In the last six weeks, things have gotten a little bit better for the economy,” said Nathan Sheets, chief economist for PGIM Fixed Income “I don’t think this is an environment where you need to go 50 basis points all at once.” — Bloomberg