Powell’s Remarks Reinforce High Probability of July Cut

We didn’t see much news in Powell’s comments today at the Council on Foreign Relations—which included both prepared remarks and a Q&A. He opened the Q&A portion by saying that he was not intending to convey a different message than at last week’s meeting. His comments reinforced our call that there is a high probability of a rate cut in July. 

Powell went over the changes in the outlook since early May that argue for a more accommodative policy setting: “What’s happened is things have changed since May 1—significantly. The global risk picture has  changed really in the last six to eight weeks, and it’s around trade developments and global growth.” He also touched on other familiar, reinforcing reasons for accommodation, which include falling market-based measures of inflation expectations, disappointingly soft core inflation, weak manufacturing in the U.S. and globally, and weaker business sentiment. There are lots of reasons to cut, and there is little reason not to.  Barring a near-total of reversal of concerns on all of these fronts by the July FOMC meeting—which is very difficult to imagine—it remains unclear what configuration of improvements on these various fronts would stop the FOMC from cutting in July. 

Powell said, in deciding whether to provide accommodation, “The question we’re going to be asking ourselves is whether these uncertainties are going to continue to weigh on the outlook. So I think with reading financial  market data it’s always a challenge to know how to react.” This was one of several instances in which he highlighted financial markets as an area where there can be rapid changes. He explicitly tied the decision not  to cut in June to a desire among FOMC members to see if changes in financial markets are “sustained.” He noted that markets can be “prescient” about emerging risks but also prone to sharp swings in sentiment that can be reversed. 

In any case, there’s no sign of a reversal with respect to any of these concerns at this point, and the market expects at least a 25-basis-point cut in July. If that remains the expectation, but for some reason, the FOMC  doesn’t want to cut in July, they will have to prepare markets for that in the lead-up to the July meeting. 

Last, we’d like to point out that Powell again referenced the idea that the greater proximity to the zero lower  bound associated with lower neutral rates means central banks should be more preemptive: “An ounce of  prevention is worth a pound of cure.” While that idea is nothing new, we point it out because similar remarks at his June press conference prompted speculation about the possibility of a 50-basis-point cut in July.1 

Today, he said, “As a general matter, I think most central banks would want to act preemptively and not let a downturn gather steam…the thought is that an ounce of prevention is worth a pound of cure…So if  you see weakness, it’s better to come in earlier, rather than later.” Powell in both cases seemed to be talking  in very general terms about the proximity to the zero lower bound warranting a more accommodative policy  

1 At his press conference last week, a reporter referenced research supporting this idea and asked Powell to comment on how it relates to the merits of a cut larger than 25 basis points. To that, Powell replied that he didn’t want to comment on the merits of cuts of various sizes because the FOMC hadn’t discussed it. But he then voiced agreement with the research the reporter had cited and the idea that “an ounce of prevention is worth a pound of cure,” which led to speculation that a July cut might be larger than 25 basis points. 

than otherwise. In this case, perhaps a 25-basis-point cut might qualify as a sufficiently more accommodative policy than otherwise; we don’t see Powell’s remarks as an indication of support for a 50-basis-point cut.2 

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