Policymakers Sticking to Patience in Face of Further Gloomy News

The minutes of the May FOMC meeting suggested that FOMC participants were firmly committed to their patient stance (see our full note). Much has changed since that FOMC meeting, including a pronounced deterioration in prospects for a resolution to U.S.-China trade disputes as well as incoming U.S. economic data pointing to slower growth in Q2. However, there has been little in FOMC participants’ recent public remarks to suggest that these developments have led to a meaningful shift in their views on monetary policy relative to what was indicated in the May minutes. 

Policymaker Remarks 

FOMC participants maintained their patient posture while continuing to be on the watch for impacts from the trade war. Powell (May 20), who gave a speech focused on financial stability, noted that it would be  “premature” to judge the outcomes from the trade tensions. He summarized: “Despite crosscurrents, the  economy is showing continued growth, strong job creation, and rising wages, all in a context of muted  inflation pressures.” He promised continued vigilance over business debt and leverage levels but assured that vulnerabilities to financial stability “do not appear elevated” and reminded the audience of the resilience of the banking system. Rosengren (May 21) saw the current policy stance as “slightly accommodative” and saw  “no clarion call” for any near-term policy adjustment. He thought tariffs could accelerate the return to 2%  inflation, but cited trade talks as a rationale for patience. He added (May 22) that trade tensions pose a  significant risk for the U.S. and foreign growth prospects, including via uncertainty effects. Bostic (May 20)  suggested his policy bias was symmetric and said he was not projecting “a rate cut to be imminent, certainly not by September. Things would have to happen for that to play out.” Williams (May 22) didn’t see the need for a move in either direction and adhered to the transitory story: “We are seeing inflationary pressures being essentially nonexistent…I do think some factors have been holding down  inflation in the current episode.” 

One exception to the symmetric bias was Bullard: in his comments to the German press (May 20), he expressed worry over inflation staying low: “With an economy booming the way it is in the U.S., inflation should be at least right at 2% or even above. We are not seeing that.” He argued that a rate cut might be  warranted if 12-month core PCE inflation does not budge from 1.6%: “If this turns out to be persistent, I’ll  get more aggressive in pushing the FOMC to lower rates in reaction and try to re-center inflation expectations  at 2%.” He repeated this argument about needing to establish credibility concerning the inflation objective  (May 22). He cited favorably the episode of cuts in 1995, which he noted preceded a period of economic expansion rather than recession. 

There were some comments on the framework review as well. Evans (May 21) strongly emphasized the importance of credibility to the success of any given framework. For example, price-level targeting would  require an inflation overshoot to compensate for a past shortfall: “You really need to follow through with  accommodative policies and be willing to go over 2%.” Powell noted that an inflation target range is also under consideration as part of the framework review. 

Nowcasts (2019:Q2) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 1.3% 1.2% 1.6%
New York Fed Staff Nowcast 1.4% 1.8% 2.2%
CNBC/Moody’s Survey 1.8% 1.9% 2.0%

Recent Data 

Last week’s weak durable goods report for April provided further evidence that real GDP growth has slowed substantially from its Q1 pace. Previously, a very strong increase in core orders had been reported for March,  leading to hopes of a pick-up in equipment investment from its tepid Q1 pace. But the March print was revised down substantially in last week’s release, from 1.4% to 0.3%. And the initial data for April provided further disappointment, with core shipments flat and core orders declining sharply. 

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Existing Home Sales MoM Apr -0.4% 2.7% — -4.9%
New Home Sales MoM Apr -6.9% -2.5% 8.1% 4.5%
Core Capital Goods Orders MoM Apr P -0.9% -0.3% 0.3% 1.4%
Core Capital Goods Shipments MoM Apr P 0.0% -0.1% -0.6% 0.0%

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