September Cut Nearly Certain, but a 50bp Cut Still a Longshot

There was plenty last week that will bear on Fed policy, including adjustments on the U.S. side to the most recent planned tariffs on imports of Chinese goods, further disappointing news on the global economy, and several significant U.S. economic data releases. We reviewed how things have changed since the last  FOMC meeting in a recent note (See The September Scorecard). This will be a big week for the Fed in terms of communication: Powell will speak on Friday at the Fed’s Jackson Hole conference, and the minutes for the  July FOMC meeting will be published on Wednesday (stay tuned for our preview). 

Policymaker Remarks 

Only a few FOMC policymakers spoke last week, which is common in the height of summer. Rosengren (Aug.  19), who dissented in July, was skeptical about the need for a second rate cut: “I just want to see evidence  that we’re actually going into something more of a slowdown.” He disagreed with the logic that the  Fed should cut in light of other central banks’ plans to provide accommodation: “Just because other countries  are weak if we’re strong it doesn’t mean we should [ease].” He also warned that Fed easing is not costless:  “We have to be careful not to ease too much when we don’t have significant problems.” Mester (Aug. 16)  said she was considering different policy scenarios: “I could see scenarios where we hold rates steady. I could see scenarios where we move the rate down. I think we just have to take the time to really evaluate.” She  said risks are “weighted to the downside,” and explained that her preference for no cut in July was a “close  call.” This is a shift from her stance in recent months that suggested more resistance to easing. Kashkari  (Aug. 16) said recession risks have increased but that recession is not his base case. On a September cut in  particular: “I’m leaning towards the camp of yes, we need to give more stimulus to the economy, more  support, we need to continue the expansion and not allow a recession to hit us.” Bullard (Aug. 15) warned,  “We are in the middle of a global slowdown,” but he said the effect on the U.S. is still unclear. In his view, a  yield curve inversion must be “sustained overtime” to send a bearish signal about the real economy. He was asked about the prospect of an emergency FOMC meeting to ease policy, but he rejected that possibility: “I  don’t think so. I think we can react appropriately. And the timing is never critical on these things. A couple  of weeks one way or another probably doesn’t matter.” 

Nowcasts (2019:Q3) 

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

Recent Data 

The July retail sales were very strong, with sales in the control group—which includes only those categories of retail sales that are direct inputs into the PCE data—rising sharply in July. After a strong second quarter,  consumer spending appears to have lots of momentum entering the third quarter. Later in the week, the preliminary results for the Michigan survey of consumers for August showed a large decline in consumer sentiment, to the lowest level since the government shutdown earlier this year. All of the major components declined, but the largest decline was in the Expectations Index. In absolute terms, however, consumer sentiment still seems to be holding up pretty well, though these latest survey results suggest U.S. consumers are apprehensive about recent developments, including further tariffs recently announced and the Fed’s decision to cut rates. 

Notwithstanding a sharp decline in overall housing starts, last week’s housing starts and permits data for July were heartening for residential investment. The decline in starts was driven by an outsize decline in the volatile multifamily category; single-family starts posted a solid gain. And permits increased much more than expected–the surprise likewise attributable to an outsize move in the multifamily category, in this case, an increase. Single-family permits increased 1.8% in July, a third consecutive monthly gain. 

In contrast to the data on consumer spending and housing, last week’s industrial production report for July was soft. Manufacturing output declined four-tenths, slightly more than the consensus, after posting a couple of consecutive gains, most notably an upwardly-revised 0.6% increase in June. 

Productivity was reported to have increased at a strong 2.3% pace in Q2. However, the bigger story with this report was the revisions, which follow recent revisions to the GDP data, and resulted in productivity growth being marked down and unit labor costs being marked up in recent quarters. Previously, four-quarter productivity growth had been reported as 2.4% in Q1. Even with the strong Q2 print, four-quarter productivity growth was a more modest 1.8% in Q2. As for unit labor costs, the four-quarter rate was 2.5% in Q2, after having previously been reported as -0.8% in Q1. Finally, last week’s CPI data for July was stronger than anticipated. A second consecutive 0.29% increase in the core CPI brought the 12-month change up a tenth to 2.2%.

Release Period Actual Consensus Revision to Previous  ReleasePreviously Released  Figure
CPI MoM Jul 0.3% 0.3% — 0.1%
CPI YoY Jul 1.8% 1.7% — 1.6%
Core CPI MoM Jul 0.3% 0.2% — 0.3%
Core CPI YoY Jul 2.2% 2.1% — 2.1%
Import Price Index MoM Jul 0.2% -0.1% -1.1% -0.9%
Import Price Index YoY Jul -1.8% -2.0% — -2.0%
Nonfarm Productivity QoQ 2Q P 2.3% 1.4% 3.5% 3.4%
Unit Labor Costs QoQ 2Q P 2.4% 2.0% — -1.6%
Retail Sales Advance MoM Jul 0.7% 0.3% 0.3% 0.4%
Retail Sales Control Group  MoMJul 1.0% 0.4% — 0.7%
Industrial Production MoM Jul -0.2% 0.1% 0.2% 0.0%
Manufacturing (SIC)  Production MoMJul -0.4% -0.3% 0.6% 0.4%
Business Inventories MoM Jun 0.0% 0.1% — 0.3%
Housing Starts MoM Jul -4.0% 0.2% -1.8% -0.9%
Building Permits MoM Jul 8.4% 3.1% -5.2% -6.1%
U. of Mich. Sentiment Aug P 92.1 97.0 — 98.4
U. of Mich. 5-10 Yr Inflation Aug P 2.6% — — 2.5%

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