On Track for an October Cut Despite Countervailing Developments

The minutes for the September FOMC meeting came out on Wednesday (see our note). We interpreted the minutes as fully consistent with our call of an October rate cut. While FOMC participants were for the most part not assuming they would cut further after the September meeting, there’s a sense that they saw a  substantial likelihood that they would. This was a Committee that was very anxious that a clear slowdown in manufacturing, trade, and investment might extend to a broader slowdown in hiring and weigh on consumer spending. 

The minutes also included a lengthy discussion of the ongoing framework review. What we learned was incremental and did not indicate clearly where the consensus is going. Again there was a focus on makeup strategies, with more discussion at this meeting of considerations that weigh against such strategies. See our note for further discussion. 

Over the last week or so, market sentiment has been buoyed by developments relating to Brexit and U.S.- China relations. About Brexit, there seems to have been real progress in avoiding a no-deal Brexit at the end of October, which now seems very unlikely. As for U.S.-China relations, after high-level talks last week a temporary truce was announced in the ongoing trade war. However, the features of the agreement that have been described point only to a limited de-escalation of recent actions taken as part of the conflict— the two main features appear to be that the U.S. will delay a threatened mid-October tariff hike and that  China has agreed to buy more U.S. agricultural products. New commitments on currency policy, intellectual property, and market access have also been cited. No official text of an agreement has been released,  however, and in any case, there’s little indication of progress on the fundamental issues that have motivated the conflict. While it’s not clear that the prospects for a more comprehensive deal that would end the conflict have risen meaningfully, even a limited de-escalation is welcome, and it does at least seem that both sides are currently motivated to cool tensions. 

On Friday morning, the FOMC and NY Fed announced that the Fed will start to buy Treasury bills beginning in mid-October to elevate the level of reserve balances to at least the level in early September. The NY Fed said the initial monthly pace of purchases will be $60 billion per month. Offerings of term and overnight repos will continue. See our note for a detailed exploration. 

Policymaker Remarks 

Speaking on Tuesday, before the balance sheet announcement, Powell (10/8) said that the “time is now upon us” to expand the balance sheet for reserve management purposes. Bullard (10/15) continued to express support for introducing a standing repo facility. Kashkari (10/14) noted that banks always have the option of using the discount window: “They don’t like it because they think it makes them look weak…They don’t want to use it so the New York Fed should have run to comfort them more quickly with a new facility…That’s  called the height of entitlement if ever there was one.” He added: “Banks are supposed to plan for their own liquidity needs. They did not do that adequately. And now they’re complaining because they failed to plan.”  Kaplan (10/11) thought, “I thought it was appropriate to distance [Friday’s] announcements from monetary  policy, and that one way to do that would be to make this announcement well in advance of the next FOMC  

meeting.” He (10/10) also supported “more-permanent steps to ensure the proper functioning of repo and  other short-term funding markets.” 

As for the policy outlook more generally, Powell (10/8) said “We believe that our policy actions are providing support for the outlook. Looking ahead, the policy is not on a preset course.” He continued, “We will be data-dependent, assessing the outlook and risks to the outlook on a meeting-by-meeting basis. Taking all that into account, we will act as appropriate to support continued growth, a strong job market, and inflation moving back to our symmetric 2% objective.” He also noted that the Fed expects recent average monthly payroll gains “may well be revised somewhat lower” but that the revised pace will still exceed the level needed to absorb new entrants to the labor market. 

Evans (10/8) surmised, “There could well be reasons to take out another insurance — 25 basis points — cut.”  He noted weakness in business investment. For the sake of boosting inflation, “I wouldn’t mind another cut.  I could see it either way.” Kaplan (10/11) said, “I’m very glad we moved in July. I’m glad we moved in  September, and now I actually would like to take some time and assess. And I’m going to keep an open mind  going into the meeting.” Kashkari (10/11) said, “if the committee chooses to move forward with a cut at the  next meeting, I would probably be in favor of that.” He even said that the FOMC’s forward guidance has been  “hawkish.” He was especially worried that the labor market is showing “signs of softening,” as “we have  evidence that wage growth is softening.” 

But not all policymakers were as open to further rate easing. Rosengren (10/11) believed “policymakers can  be patient and continue to evaluate incoming data before taking additional action.” He added, “My forecast  for the economy does not envision additional easing being necessary.” Mester (10/10) said policymakers  should “not pre-judge where policy is going, one way or the other.” She noted: “I will be particularly attentive  to signs that the weakness in investment and manufacturing is broadening, and spilling over to reductions in  hiring and household spending, and to signs that long-run inflation expectations are destabilizing.” 

Nowcasts (2019:Q3) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 1.7% 1.8% 2.1%
New York Fed Staff Nowcast 2.0% 2.0% 2.1%
CNBC/Moody’s Survey 1.7% 1.7% 2.0%

Recent Data 

Last week’s PPI and CPI reports for September were both soft, pointing to a modest gain in core PCE prices in September. The core CPI edged up 0.1% following several months of firm readings, as core goods prices declined 0.3%. The 12-month core PCE inflation rate is likely to be 1.7% in September. The measure of longer-term expected inflation from the University of Michigan consumer survey also declined two-tenths in  October to 2.2%, matching its all-time low. The Michigan survey also included some heartening news, as consumer sentiment posted another gain. Increases in September and October have now reversed most of the sharp decline in August. The median three-year-ahead expected inflation rate from the New York Fed’s consumer edged down to 2.4% in October, extending a fairly steady decline in that measure over the course of this year. We have seen inflation and inflation expectations not as a primary motivator of recent FOMC  easing actions but rather as a feature of the outlook allowing more accommodative policy. However, we expect recent softness to bolster the case for an October cut at a time when many FOMC participants do not see the economy slowing sharply and when recent developments have been positive for geopolitical risks.

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
NFIB Small Business Optimism Sep 101.8 102.0 — 103.1
PPI Final Demand MoM Sep -0.3% 0.1% — 0.1%
PPI Final Demand YoY Sep 1.4% 1.8% — 1.8%
Core PPI MoM Sep -0.3% 0.2% — 0.3%
Core PPI YoY Sep 2.0% 2.3% — 2.3%
Wholesale Inventories MoM Aug F 0.2% 0.4% — 0.4%
CPI MoM Sep 0.0% 0.1% — 0.1%
CPI YoY Sep 1.7% 1.8% — 1.7%
Core CPI MoM Sep 0.1% 0.2% — 0.3%
Core CPI YoY Sep 2.4% 2.4% — 2.4%
Import Price Index MoM Sep 0.2% 0.0% -0.2% -0.5%
Import Price Index YoY Sep -1.6% -2.1% -1.8% -2.0%
U. of Mich. Sentiment Oct P 96.0 92.0 — 93.2
U. of Mich. 5-10 Yr Inflation Oct P 2.2% — — 2.4%

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