Last Thursday we moved up our projected timing of the first-rate cut to September. While the change in our call wasn’t motivated by Clarida’s speech around the same time, we saw his pivot to nimbleness and comments about potentially adjusting policy to downside risks as consistent with our change in the call. Shortly after all this, Trump announced new tariffs on Mexico, and speculation about near-term rate cuts has escalated, with many other private forecasters calling for near-term cuts as well. Several policymakers have commented on this speculation, and yesterday for the first time we heard from Powell and Clarida on the matter. Policymakers for the most part have stressed that they don’t see a reason to cut today—as we’d expect them to say—but they also haven’t pushed back on this speculation as hard as they could have. Instead, they’ve signaled a willingness to adjust policy as circumstances warrant. This initial response makes us marginally more comfortable with our call of a September rate cut.
Yesterday morning Powell gave opening remarks for the Fed’s research conference in Chicago, part of the “Fed Listens” series, and he took the opportunity to respond briefly to these developments. He said: I’d like first to say a word about recent developments involving trade negotiations and other matters. We do not know how or when these issues will be resolved. We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.
These remarks seem to have been widely interpreted as signaling openness to rate cuts. It’s true that he didn’t push back on market expectations of rate cuts, and it’s true that these remarks signal openness to rate cuts—should circumstances warrant them. But the question continues to be what circumstances would warrant an easing; we already knew that the FOMC is open to rate cuts. On this question, Powell’s remarks didn’t provide much new information. That’s why we say this response makes us only marginally more comfortable with our call.
Clarida gave an interview on CNBC yesterday. He talked about looking through the price-level effect of higher tariffs (“not inflationary”) but taking into account negative effects on the growth outlook: “do what you can” if there is slower growth (and slower productivity growth due to supply chain disruption). He flagged further tariffs and retaliation as a risk: “As we move ahead and consider potentially more tariffs and potential retaliation that potentially has a more noticeable effect on the economy and we would have to take that into account.” Not much new here.
Clarida’s comments on what might warrant a policy response were interesting because he signaled a willingness to adjust policy if a number of perhaps modest changes to the outlook together warrant it; there doesn’t have to be a massive change in one area. We see this as in line with our logic for our September rate cut call. As we wrote in our change in the call, we don’t want to overstate the severity of any one of these recent developments taken in isolation. Rather, we think that by September the argument will prevail that,
after a long period of patience, a 25-basis-point rate cut would represent a prudent recalibration of monetary policy. Clarida said, if “we get a sense that growth is slower than we expect, and if we get the sense that underlying inflation is below where we want it to be, then … we’re going to put in place appropriate policy to achieve those goals.” This talk of getting a “sense” represents a lower bar for adjusting policy than needing clear evidence in the data. He explicitly did not rule out a preemptive cut: “Whether or not [appropriate policy] means acting preemptively or when the data comes in is just going to depend on the context at the time.” But he also said the FOMC “can’t be handcuffed to” market expectations.
Other FOMC Participants
Other policymakers have also expressed openness, in theory, to a rate cut, while expressing caution about recent market speculation. Bullard has gone the furthest, saying, “A downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than-expected slowdown.” Daly stuck to patience but also said “If growth fell sharply or if inflation didn’t look like it was going to achieve 2% on a sustainable basis…bringing [the fed funds rate] lower is something we want to discuss.” Evans described himself as open to adjusting policy: “there is a reason to be thinking about the stance of policy” and “with inflation being a little on the light side, there’s the capacity to adjust policy if that’s necessary.” He remains “pretty comfortable with where we are at the moment in looking at the data, but there is uncertainty, for sure.” Responding specifically to a question about market expectations of two rate cuts this year, Evans said, “Well, I mean, at face value it suggests that the market sees something I have not yet seen in the national data.” Likewise, Kashkari said “Either of those [low inflation or escalating trade tensions] could be cause for changing the path of monetary policy,” but “I’m not quite there yet. I take a lot of comfort from the fact that the job market continues to be strong.” Kaplan said that “We’re very cognizant of these downside risks and very cognizant of the change in the shape of the yield curve.” However, he said, “I want to take a little bit more time and be patient here because some of these recent events could be reversed,” and “The only reason I’m not suggesting a specific action yet is it’s very recent.”