Policymakers’ Remarks, Strong Jobs Data Suggest Near-Term Rate Cut Unlikely

In the statement released following last week’s meeting, the FOMC acknowledged the recent news that on a  12-month basis both core and headline PCE inflation had declined to below 2% in March—core to 1.6% and headline to 1.5%. However, in his press conference Chair Powell showed little concern about too-low inflation and suggested that there is unlikely to be a cut in rates in the near term, at least on this basis alone (click here for our complete take on last week’s FOMC meeting). Moreover, we saw the strong April jobs report released late last week as further reducing the likelihood of a rate cut in the near term (click here for our take on the April jobs report). The economy doesn’t appear to have cooled at all, and it’s now at least possible to imagine a scenario in which another rate hike seriously enters the conversation. However, the FOMC remains much more focused on keeping the expansion going rather than heading off overheating, and we continue to expect that the next move will be a cut (likely in 2020) rather than a hike. 

Policymaker Remarks 

After the FOMC meeting, several policymakers echoed Powell’s remarks at his press conference by reiterating their support for a patient policy posture. But there were varying interpretations of the inflation outlook given the recent weakness in inflation. Mester (May 3) thought the current target range was “in the range of neutral” and did not seem open to a rate cut. She thought inflation was close to the 2% objective but “a little bit soft” and said if it continues to slow, then “some action” would be warranted. But inflation at  current levels means they can “take advantage of the fact that labor markets are going to be strengthening.”  Kaplan (May 3) said, “despite some recent weakness in headline and core inflation readings, the headline PCE  and Dallas Fed trimmed mean measure of PCE inflation are likely to firm, and we do believe we’re going to end the year in the neighborhood of 2 percent.” He saw GDP growth this year at around 2¼%, which “should be sufficient to further tighten the labor market and cause the rate of wage growth to modestly pick up over the course of 2019.” Harker (May 6) was hopeful for inflation “slightly above” 2% in the medium term, but thought “some” of the recent weakness was transitory. Bullard (May 3) also pointed to the Dallas Fed trimmed mean measure as suggesting that underlying inflation is higher than the current levels of the 12-month core and headline PCE measure suggest. But he said he would be “open to a rate cut” if “we go through the  summer here and inflation expectations are still too low and actual inflation doesn’t seem to be picking up.”  Evans (May 3) saw this period as the “data monitoring phase” and thought lower inflation expectations were  “worrisome.” He wanted to wait for more data before seriously considering a policy response. He saw a  “distinct risk that inflation expectations are too low and will be slow to recover to” levels consistent with the  Fed’s 2% objective. Further diverging from Powell’s tone at the postmeeting press conference, Evans warned,  “Although some of this drop may be due to temporary special factors, we don’t want to be too dismissive of  this development.” In a speech largely focused on theoretical aspects of monetary policy, Clarida (May 3)  reiterated his broad, upbeat assessment of the U.S. economy: “the U.S. economy is in a very good place.  The unemployment rate is at a 50-year low, real wages are rising in line with productivity, inflationary  pressures are muted, and expected inflation is stable.” 

With the flagship conference coming up in June, the Fed’s framework review remained a key topic. Williams endorsed an average inflation targeting approach. He found the current approach wanting, noting that  “inflation expectations will be anchored at a level below the inflation target, which in turn exacerbates the  deleterious effects of the lower bound on the economy.” His solution was “following an average-inflation targeting framework that aims for above-target inflation” when the policy rate is above zero. Furthermore, a  “dynamic” approach that raises inflation expectations by keeping policy rates “lower for longer” after low 

inflation episodes could help alleviate the downward bias in inflation and inflation expectations. Evans (May  6) argued that the “first step” was to “establish credibility in the current framework,” specifically concerning the “symmetry of the inflation target.” He repeated his “willingness to embrace inflation modestly above  2 percent 50 percent of the time and following through with policy actions and communications aimed at  achieving this outcome,” which means accepting “core inflation rates of 2-1/2 percent as long as there was  no obvious upward momentum and the path back toward 2 percent could be well managed.” But he did not repeat his idea of creating a 1.5% inflation rate as a threshold for a rate cut. Bullard (May 3) continued to  advocate nominal GDP targeting, arguing that it “provides a form of insurance for all households against  future aggregate shocks.” There was far from a clear consensus on moving to a new policy framework,  however, with policymakers continuing to have reservations about credibility. Daly (May 3) said she found average inflation targeting “an attractive option” but warned that “the bar for change is high,” citing credibility as a challenge. Likewise, Mester (May 3) said, “One needs to ask whether it is credible for policymakers to  commit to keeping interest rates low to make up for past shortfalls of inflation from target even when demand  is growing strongly or to act to bring inflation down in the face of a supply shock by tightening policy even  in the face of weak demand.”  

Nowcasts (2019:Q2)

Source Current
Atlanta Fed GDPNow 1.7%
New York Fed Staff Nowcast 2.1%
CNBC/Moody’s Survey 2.0%

Recent Data

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Personal Income MoM Mar 0.1% 0.4% — 0.2%
Personal Spending MoM Mar 0.9% 0.7% 0.1% 
Personal Spending MoM Feb 0.1% 0.3% 0.3% 0.1%
PCE Prices MoM Mar 0.2% 0.3% 0.1% 
PCE Prices YoY Mar 1.5% 1.6% 1.3% 
Core PCE Prices MoM Mar 0.0% 0.1% 0.1% 
Core PCE Prices YoY Mar 1.6% 1.7% 1.7% 
Employment Cost Index QoQ 1Q 0.7% 0.7% — 0.7%
Pending Home Sales MoM Mar 3.8% 1.5% — -1.0%
Conf. Board Consumer Confidence Apr 129.2 126.8 — 124.1
ISM Manufacturing Apr 52.8 55.0 — 55.3
Construction Spending MoM Mar -0.9% 0.0% — 1.0%
Wards Total Vehicle Sales Apr 16.40m 17.00m — 17.50m
Nonfarm Productivity QoQ 1Q P 3.6% 2.2% 1.3% 1.9%
Unit Labor Costs QoQ 1Q P -0.9% 1.5% 2.5% 2.0%
Core Capital Goods Orders MoM Mar F 1.4% — — 1.3%
Core Capital Goods Shipments MoM Mar F 0.0% — — -0.2%
Advance Goods Trade Balance Mar -$71.4b -$73.0b — -$70.9b
Wholesale Inventories MoM Mar P 0.0% 0.2% — 0.2%
Change in Nonfarm Payrolls Apr 263k 190k 189k 196k
Unemployment Rate Apr 3.6% 3.8% — 3.8%
Average Hourly Earnings MoM Apr 0.2% 0.3% 0.2% 0.1%
Average Hourly Earnings YoY Apr 3.2% 3.3% — 3.2%
Labor Force Participation Rate Apr 62.8% 63.0% — 63.0%
ISM Non-Manufacturing Index Apr 55.5 57.0 — 56.1

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