Vice Chair Clarida’s interview this morning with Bloomberg provided some hints as to the relative importance of the many recent developments in pushing the FOMC toward easing. It’s hard to imagine the worrying conditions he emphasized most—heightened uncertainty, especially related to the global economy—being resolved anytime soon. Reading between the lines, a near-term rate cut seems quite likely.
Clarida explained the shift in the FOMC’s stance by saying, “There has been elevated uncertainty about the outlook. The economy is hitting some crosscurrents now, there’s been a marking-down of global growth prospects, there’s uncertainty about international trade, there’s some evidence that’s weighing on sentiment a bit.” He didn’t cite the May labor market report, weak inflation, or recent downward moves in measures of inflation expectations, though we don’t interpret that as suggesting they don’t matter to him.
Clarida elaborated on what he means by uncertainty: “We really have uncertainty in the sense that there’s always some geopolitical uncertainty, but there’s also uncertainty about how the global economy navigates at a point, you know, you have negative interest rates in the eurozone and Japan. Those countries are well away from where they want to be. And I think that is a factor as well.” It seems very unlikely that “the incoming data flow” could in the near term alleviate heightened uncertainty and concerns about global growth prospects enough to reverse the FOMC’s apparent inclination to ease.
Clarida’s comments about the nature of the uncertainty facing the global economy are also consistent with what we have said about the asymmetric implications for monetary policy of developments relating to U.S.- China tensions, especially possible outcomes of talks at the upcoming G20 meeting: A negative outcome would increase the probability of a Fed rate cut much more than a positive outcome would reduce the probability of a cut. Even if the U.S. and China announce some sort of agreement by the July FOMC meeting, considerable uncertainty is very likely to remain with respect to tariffs and trade policy. Moreover, even in best-case scenarios on the U.S.-China front, uncertainty about the broader global economic outlook will certainly remain in the near term. While effects such as a boost to business sentiment might be readily apparent soon after a deal, any resulting improvement in the global economic picture wouldn’t be apparent in the hard data for some time. The evidence of a slowdown in global growth is something that has been building for several quarters.
Clarida was deliberately noncommittal about specific triggers for a rate cut. He was asked what the implications would be of another weak employment report, which of course he didn’t answer directly. He acknowledged that “we did have a soft print recently, but it’s important for your viewers to know that we’re not looking at any one data point.” He then listed a number of data releases that would be relevant: “We’re getting data on GDP, toward the end of July. We’ll get data on PCE inflation pretty soon. Obviously we get a lot of global data, we’re looking at the global manufacturing cycle. We’re looking at the downward estimates to global growth as well. So there are a lot of factors.” Again, it’s unclear what outcomes for these and other data releases could substantially reduce uncertainty about the global economic outlook in such a short period of time.
Clarida was also asked about how he thinks about the effects on the economy of rate cuts, particularly whether the effects are linear. He responded, “A lot of our models are linear…But the real world is nonlinear. And I think, as policymakers, we factor that in as we can. So the linear response is the starting point, but in that room and in that meeting we are certainly alert to nonlinearities.” His answer wasn’t particularly telling. But it suggests that policymakers are thinking about issues like differing effects of easing by various amounts or at various times (for example, different market conditions or expectations for Fed policy).