Policymakers Monitoring Market Unrest, But Cautious in Judging Implications for Outlook

The financial market unrest that began following the most recent escalation in U.S.-China trade tensions continues. Our call remains that the FOMC will cut rates a further 25 basis points this year. The most recent escalation and subsequent market moves led us to think the next cut will happen sooner, in September, and to see a higher probability of a third cut by the end of this year. The market continues to expect much more easing than is in our baseline. In their initial comments on recent developments, policymakers have been cautious, signaling openness to ease to sustain the expansion while emphasizing that their focus concerning such developments is to assess the implications for the outlook and then adjust their policy views accordingly. 

Policymaker Remarks 

Brainard (8/5) said “I am certainly monitoring developments very closely…We’re committed to sustaining the expansion and I’m certainly monitoring developments for their implications for the outlook and I’ll continue to be very attentive to them.” George (8/5) seemed to prefer to wait for more conclusive evidence: “markets move quickly. It takes some time to see how that evolves and so the best I think that you can do right now  is just to monitor and see how that unfolds.” Daly (8/6) said the trade headwind “is amplified” and “we’re  in a picked-up position.” She noted the possibility that slower global growth could keep the neutral rate suppressed and justify more easing. Evans (8/7) warned that “There is a role for risk management,” and  “inflation alone” would merit additional easing. He also said: “As long as inflation continues to behave the  way that it has, I think we have the capacity to pursue these accommodative stances.” Bullard (8/6) warned that  the Fed is not equipped to react to trade tensions with high frequency and that the FOMC has already “done  a lot” to support growth. He further noted that current monetary policy is “considerably more accommodative  today than it was as of late last year.” He said he is maintaining his projection of two 25-basis-point cuts this year. 

Nowcasts (2019:Q3) 

Source Current One Week Ago
Atlanta Fed GDPNow 1.9% 1.9%
New York Fed Staff Nowcast 1.6% 1.6%
CNBC/Moody’s Survey 1.9% 1.9%

Recent Data 

The headline composite for the ISM non-manufacturing survey fell further in July. There’s been a substantial if uneven, decline in the composite from an expansion high reached last fall. While all of the main components have contributed to that decline, the business activity and new orders measures have contributed the most over that period, and that was the case in July as well. Producer prices were soft in July. The core index excluding food and energy edged down a tenth, compared to the consensus expectation of a slight increase,  and that resulted in the year-ago measure declining two tenths to 2.1%. 

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
ISM Non-Manufacturing Index Jul 53.7 55.5 — 55.1
Wholesale Inventories MoM Jun F 0.0% 0.2% — 0.2%
PPI Final Demand MoM Jul 0.2% 0.2% — 0.1%
PPI Final Demand YoY Jul 1.7% 1.7% — 1.7%
Core PPI MoM Jul -0.1% 0.1% — 0.3%
Core PPI YoY Jul 2.1% 2.3% — 2.3%

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