Policymakers See Domestic Outlook As “Favorable” Even as Global Outlook Worsens

Just as Powell did at his press conference following the July FOMC meeting, the minutes of that meeting framed the July cut as a “recalibration” or “mid-cycle adjustment” of policy based on a careful assessment of developments over some time—and not a knee-jerk reaction to the most recent developments. After the minutes, we saw an even lower probability of a third cut this year (see our commentary). We see the FOMC  easing in July and the expected cut in September as a combination of “mid-cycle adjustment” and “risk management,” and hence not necessarily a prelude to further cuts after September. 

The release of the July minutes was followed on Friday by Powell’s speech opening the Jackson Hole conference. We saw his remarks there as consistent with what the minutes had suggested—albeit updated to reflect developments since the July meeting—so Powell’s speech didn’t meaningfully affect our views on the outlook for monetary policy. He outlined developments in the “eventful” three weeks since the July meeting that has contributed to a “complex, turbulent picture” but contrasted those developments with the still-benign incoming data on the U.S. economy (see our commentary). 

That picture became more turbulent after Powell spoke on Friday. China’s announcement of retaliatory tariffs on U.S. goods was followed by an announcement by Trump late on Friday that prospective and existing tariffs on Chinese imports would be raised even further than previously announced. In addition, he suggested that he would order U.S. companies out of China entirely. Markets reacted unfavorably, of course, with equities declining sharply. A series of confusing statements followed over the weekend, but what’s clear is that the rhetoric at least has cooled and negotiations will continue, calming markets to start this week. 

Policymaker Remarks 

The annual gathering of policymakers at the Jackson Hole symposium provided an opportunity for FOMC  participants to present their views on the economic outlook and monetary policy. Clarida (Aug. 23) had the last word, giving the last interview of the week after others had spoken. He declined to offer guidance for  the policy path going forward other than to reiterate that they will “act as appropriate to keep the economy  in a good place.” He claimed that “We take our policy decisions one meeting at a time.” Like Powell, he acknowledged that “the global outlook has worsened since our July meeting. The global economy is slowing 

and there are disinflationary pressures.” While the U.S. economy remains a bright spot, they “have to take  into account global developments.” But Clarida was clear that he did not currently see an elevated risk of  recession. He acknowledged that “financial market indicators are to some extent moving in that direction,”  but said that “if you look at a lot of other indicators, I just don’t see it.” 

Bullard (Aug. 23) went furthest in endorsing a September cut, noting that he “would like to take out more  insurance against the downside risks.” If further accommodation proves unnecessary, the FOMC can “take  the insurance back.” He also predicted that “there will be a robust debate about 50, so I think it’s creeping  onto the table here, but obviously the markets have a base case of 25 basis points.” Kaplan (Aug. 22) saw  the potential for a September cut on account of downside risks from global growth and trade tensions: “I’d  like to avoid having to take further action, but I think I’m going to have an open mind about taking action  

over at least the next number of months if we need to.’’ Kashkari (Aug. 21) said the Fed could ease and use  forward guidance to “provide even more of a boost to the economy than a rate cut alone can deliver.” 

Others were not as presumptive about a September cut. Daly (Aug. 20) supported the July cut, arguing that  it was appropriate to support a solid domestic economy in the face of “considerable headwinds, like weaker  global growth and trade uncertainties.” Rosengren (Aug. 19) was quite clearly against assuming a September  cut would be necessary: “I just want to see evidence that we’re actually going into something more of  a slowdown.” Harker (Aug. 22) said he was “on hold” and that, “I think we should stay here for a while and  see how things play out.” He opposed the July cut: “I didn’t think the cut was appropriate, necessarily, but I  went along with it to get back to neutral.” Mester (Aug. 23), who also opposed the July cut, said of  September: “we should keep things where they are, but I am very attuned to the downside risks of the  economy.” George (Aug. 22), too, was skeptical: “it’s not yet time. I’m not ready to provide more accommodation to the economy without” certain signs of deterioration. To her, “easing policy is not a free  choice.” 

Yield curve inversion remained a topical issue given the recent behavior of Treasury yields. Bullard said “Our  job is to get the yield curve uninverted” and that he was “not [interested] in testing someone’s theory that  this time is different, with the yield curve.” Other policymakers showed less concern. Mester was skeptical of the signaling value of the yield curve given safe-haven flows. Clarida was as well, and he suggested that  what has happened to the U.S. yield curve is more about “the real marking down of the global outlook” rather  than “what’s been going on in the U.S.” 

Nowcasts (2019:Q3) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 2.3% 2.2% 1.9%
New York Fed Staff Nowcast 1.8% 1.8% 1.6%
CNBC/Moody’s Survey 2.0% 2.0% 1.9%

Recent Data 

The Markit U.S. PMI surveys for August were soft, with both the headline services and manufacturing indexes declining. A fall in the new orders component was responsible for the weakness in the manufacturing index,  which has been on a declining trend since mid-2018. This morning’s durable goods report for July had negative implications for equipment spending in Q3, as core shipments posted a surprising decline in July on top of a downward revision to the June data. Still, rising core orders suggest shipments will firm in the coming months. Core orders increased in July, beating the consensus, though the June gain was marked down to a  still-robust 0.9%. New home sales declined sharply in July, but from a June level that was revised up substantially. While the data have been choppy month to month, sales—for both existing and new homes— have firmed this year after having fallen over 2018. 

Last week the BLS also released its preliminary benchmark revision announcement for the Current Employment  Statistics, which suggests the likely direction of the final revisions, to be released in February 2020. The announcement suggested that taking into account state unemployment insurance tax data, the level of payroll employment in March 2019 was 501K lower than previously reported. That’s a downward revision of -0.3%,  somewhat larger than the average revision over the last ten years of plus or minus two-tenths. That in turn suggests that payrolls haven’t been growing as fast since 2018 as previously reported. However, even after 

a substantial downward revision, the pace of payroll gains through early this year was certainly still very solid.  This announcement seems to bring the payroll data more in line with the household survey data. The unemployment rate declined only two-tenths over the year through March 2019, a surprisingly small amount given that payroll gains had been reported as averaging over 200K per month over that period.

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Existing Home Sales MoM Jul 2.5% 2.5% -1.3% -1.7%
Markit US Manufacturing PMI Aug P 49.9 50.5 — 50.4
New Home Sales MoM Jul -12.8% 0.2% — 7.0%
Durable Goods Orders MoM Jul P 2.1% 1.2% 1.8% 1.9%
Core Capital Goods Shipments MoM Jul P -0.7% 0.1% 0.0% 0.3%
Core Capital Goods Orders MoM Jul P 0.4% 0.0% 0.9% 1.5%

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