Policymakers Provide Little Pushback on Expectations of Rate Cuts

The June FOMC meeting represented just about the biggest dovish turn possible without an actual rate cut.  We saw the events of the June FOMC meeting—the statement, projections, and Powell’s press conference— as suggesting a higher probability of a cut at the July meeting, though we still see it as less certain than the market, which is pricing a near-100 percent probability. (Click here for our full reaction to the FOMC meeting.)  Following the FOMC meeting, several policymakers explained their own views in the context of the change in the FOMC’s policy posture. While there was some variation in their views, even those who didn’t explicitly advocate a rate cut provided little reason to doubt the FOMC’s openness to easing policy at an upcoming meeting. 

Policymaker Remarks 

Bullard (Jun. 21), who dissented at the June meeting to express his preference for an immediate rate cut,  explained that a cut now “would provide insurance against further declines in expected inflation and a slowing  economy subject to elevated downside risks.” He added, “Even if a sharper-than-expected slowdown does  not materialize, a rate cut would help promote a more rapid return of inflation and inflation expectations to  target.” Kashkari (Jun. 21), who is not currently an FOMC voter, seemed to concur with Bullard’s view,  revealing that he “advocated for a 50-basis-point rate cut” and wanted the FOMC to commit “not to raise  rates again until core inflation reaches our 2 percent target on a sustained basis.” To him, keeping inflation expectations consistent with 2 percent inflation was key. 

But other policymakers seemed less sure of the merit of an immediate rate cut. Brainard (Jun. 21) said “the  most likely path for the economy remains solid” but the emergence of downside risks “could weigh on economic  activity.” As such, risk management with a low r-star and proximity to the effective lower bound “would  argue for softening the expected path of the policy when risks shift to the downside.” Clarida (Jun. 21) said, “the case for providing more accommodation has increased” and reiterated that “as appropriate we will deploy those tools” to sustain the expansion. He emphasized uncertainty about global economic prospects as a  motivation for the Fed’s change in posture. Because this type of uncertainty seems unlikely to be quickly resolved, we saw this emphasis as supporting the prospect of a near-term rate cut. (Click here for a detailed  analysis of Clarida’s remarks.) 

Nowcasts (2019:Q2) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 2.0% 2.1% 1.4%
New York Fed Staff Nowcast 1.4% 1.4% 1.0%
CNBC/Moody’s Survey 1.9% 1.9% 1.7%

Recent Data 

There was relatively little significant incoming U.S. economic data last week. Declines in the headline indices for the regional manufacturing surveys conducted by the Federal Reserve banks of Philadelphia and New York preceded a decline in the Markit manufacturing PMI—further evidence of a cooling in business sentiment in recent months that has caught the FOMC’s attention. There were also several housing releases last week.  These were mixed, and none were particularly striking. The NAHB housing market index showed a slight decline in homebuilder sentiment, disappointing expectations, but still showing a rise since late last year.  Existing home sales were somewhat stronger than expected in May and earlier dates were also marked up.  The housing starts and permits data for May were mixed. A positive highlight was a solid 3.7% increase in single-family permits in May, but there’s still no clear sign of a change in the downward trend that began earlier last year. 

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Empire Manufacturing Jun -8.6 11.0 — 17.8
NAHB Housing Market Index Jun 64.0 67.0 — 66.0
Housing Starts MoM May -0.9% 0.3% 6.8% 5.7%
Building Permits MoM May 0.3% 0.1% 0.2% 0.6%
Philadelphia Fed Business Outlook Jun 0.3 10.4 — 16.6
Markit US Manufacturing PMI Jun P 50.1 50.5 — 50.5
Existing Home Sales MoM May 2.5% 2.1% 0.0% -0.4%

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