Chair Powell’s semiannual monetary policy to Congress and the minutes of the June 18-19 Federal Open Market Committee meeting imply a strong likelihood that the Fed will lower short-term interest rates on July 31. However, contrary to market expectations, there’s little to suggest the possibility of a 50-basis-point move. Let’s start with the FOMC minutes:
“With regard to the outlook for monetary policy beyond this meeting, nearly all participants had revised down their assessment of the appropriate path for the federal funds rate over the projection period in their SEP submissions, and some had marked down their estimates of the longer-run normal level of the funds rate as well. Many participants indicated that the case for somewhat more accommodative policy had strengthened. Participants widely noted that the global developments that led to the heightened uncertainties about the economic outlook were quite recent. Many judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook. Several others noted that additional monetary policy accommodation could well be appropriate if incoming information showed further deterioration in the outlook. Participants stated a variety of reasons that would call for a lower path of the federal funds rate. Several participants noted that a near-term cut in the target range for the federal funds rate could help cushion the effects of possible future adverse shocks to the economy and, hence, was appropriate policy from a risk-management perspective. Some participants also noted that the continued shortfall in inflation risked a softening of inflation expectations that could slow the sustained return of inflation to the Committee's 2% objective. Several participants pointed out that they had revised down their estimates of the longer-run normal rate of unemployment and, as a result, saw a smaller upward contribution to inflation pressures from tight resource utilization than they had earlier. few participants were concerned that inflation expectations had already moved below levels consistent with the Committee's symmetric 2% objective and that it was important to provide additional accommodation in the near term to bolster inflation expectations. for some time could help strengthen the credibility of the Committee's commitment to its symmetric 2% inflation objective.”
As Chair Powell mentioned in his June 19 press conference, Fed policymakers saw a return of cross-currents in May and early June – notably, trade policy uncertainty and concerns about global growth. The FOMC minutes indicate that officials wanted to see if these developments would be sustained. While downside risks to the economic outlook had increased, we know from the revised dot plot that officials were split on whether rate cuts would be needed at all this year. The view from those wanting to hold off:
“Some participants suggested that although they now judged that the appropriate path of the federal funds rate would follow a flatter trajectory than they had previously assumed, there was not yet a strong case for a rate cut from current levels. They preferred to gather more information on the trajectory of the economy before concluding that a change in policy stance is warranted. the view that with the economy still in a favorable position in terms of the dual mandate, an easing of policy in an attempt to increase inflation a few tenths of a percentage point risked overheating the labor markets and fueling financial imbalances. Several participants observed that the trimmed mean measure of PCE price inflation constructed by the Federal Reserve Bank of Dallas had stayed near 2% recently, underscoring the view that the recent low readings on inflation will prove transitory.”
This leads to the key paragraph from Powell’s testimony:
“In our June meeting statement, we indicated that, in light of increased uncertainties about the economic outlook and muted inflation pressures, we would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.”
Trade policy uncertainty and global growth concerns have not gone away. The logical conclusion is that a July 31 rate is a near certainty. Asked (on June 19) about whether the Fed might cut by 50 bps, Powell replied that “that’s just something we haven’t really engaged with yet, and it will depend very heavily on incoming data and the evolving risk picture as we move forward.” At the same time, “in a world where you are closer to the effective lower bound, it’s wise to react to prevent a weakening from turning into a prolonged weakening.” However, with officials split, 50 bps in July would be a stretch.
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