This meeting represented just about the biggest dovish turn possible without an actual rate cut. Eight participants had at least one rate cut this year in their baseline, and seven of those had 50 basis points in easing this year. And in his prepared remarks Powell elaborated that, “Though some participants wrote down policy cuts and others did not, our deliberations made clear that a number of those who wrote down a flat rate path agree that the case for additional accommodation has strengthened since our May meeting.” We now see a higher probability of a cut at the July meeting, though we still see it as less certain than the market, which is pricing a near-100 percent probability.
There is a lot to go over. We’ll start by mentioning highlights from the initial releases (dots, macro projections, and statement), then go over the highlights from Powell’s press briefing. We’ll end by going over some of the other details of the projections.
Statement and Projection Highlights
The dots showed that a large contingent of FOMC participants supports easier accommodative policy by year-end 2019: Seven participants projected a 50-basis-point lower funds rate, and an additional participant projected one 25-basis-point cut by year-end. Although we have been expecting a cut in the near term, we didn’t expect so many participants to show cuts in their dots.
Not only is the 2020 hike from the March median dots gone, the median dots now show a cut in 2020, which is reversed by a hike in 2021. The median longer-run dot also declined to 2.5%.
The revisions to the macro projections were about as expected. The most telling revision was a downward revision to the median projection for core PCE inflation in 2020, to 1.9% (from 2.0% in March).
The FOMC revised the fund’s rate guidance in the second paragraph in a quite dovish direction. They again said, “The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes,” but to the end of that sentence they tacked on the qualifier, “but uncertainties about this outlook have increased.” This represents an acknowledgment that risks to the outlook, not just the modal outlook, matter for the setting of policy. It’s also a tacit acknowledgment that risks are currently tilted to the downside.
The FOMC removed “patient” from the subsequent sentence in the second paragraph of the statement. They now say, “In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.” The removal of the patient and the addition of “closely monitor” suggests a willingness to move in July.
The changes to the language in the first paragraph, which goes over the incoming data, weren’t a big surprise. Growth was downgraded to “moderate” and they pointed to a pickup in household spending and continued weakness in business fixed investment. They opted not to specifically reference the soft May jobs print. The most important development was a change to the last sentence, on indicators of longer-term inflation
expectations. We’d expected them to mention a decline in either market-based measures of inflation compensation or survey-based measures of longer-term inflation expectations. The statement now says that “Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.”
Bullard dissented because he wanted a cut at this meeting. That doesn’t tell us much, but it does reinforce that the main issue is when, not whether, to cut rates. It was the first dissent since Powell became Chair.
Powell’s Press Conference
The dots showed strong support for easing, and the statement signaled a willingness to do so. In his prepared remarks at his press conference, Powell doubled down on that message, elaborating that, “Though some participants wrote down policy cuts and others did not our deliberations made clear that a number of those who wrote down a flat rate path agree that the case for additional accommodation has strengthened since our May meeting.”
But the FOMC didn’t cut rates today, and Powell said, “there was not much support for cutting rates at this meeting.” Powell was deliberately vague on the conditions for a rate cut. Over and over, he said things like, while “a number of people wrote down rate cuts,” even among them there was a sense “that it would be better to see more before moving…some of these are so recent that want to see whether they’ll sustain. So, we felt that it would be better to get a clearer picture of things and that we would in fact learn a lot about these developments in the near term. Ultimately the question we’re asking ourselves is are these risks going to be continuing to weigh on the outlook.” When asked if a deal with China would take the possibility of rate cuts off the table, he responded, “so I would say that we’re not looking at any one thing…We’re not exclusively focused on one event or one piece of data. Risks seem to have grown…we’ll be asking the question whether those risks will continue around the outlook.”
The FOMC also appears to be considering the possibility that it might exacerbate swings in sentiment by acting hastily. Powell seemed to suggest that this was a primary consideration for the FOMC in its decision not to cut rates today: “Uncertainties surrounding the baseline outlook have clearly risen since our last meeting. It is important, however, that monetary policy not overreact to any individual data point or short
term swing in sentiment. Doing so would risk adding even more uncertainty to the outlook.”
Here’s how Powell started off describing recent developments in his prepared remarks: “In the weeks since our last meeting, the crosscurrents have reemerged. Growth indicators from around the world have disappointed on the net, raising concerns about the strength of the global economy. Apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture report heightened concerns over trade developments. These concerns may have contributed to the drop in business confidence in some recent surveys and may be starting to show through to incoming data. Risk sentiment in financial markets has deteriorated as well. Against this backdrop, inflation remains muted.” It hasn’t all been bad: The labor market looks strong and consumption appears to have “bounced back.” But, “while the baseline outlook remains favorable, many FOMC participants cited the investment picture and weaker business sentiment, and the crosscurrents I mentioned earlier [weaker global economy and trade uncertainty], as supporting their judgment that the risk of less favorable outcomes has risen.”
This initial list of “crosscurrents” and considerations was very much focused on trade and global growth, clearly. But he then turned to the inflation picture, and his comments made it clear that this was also a key reason the FOMC was considering easing. His comments on below-target inflation were notably different from his comments in March when the focus was on transitory weakness: “Setting aside short-term fluctuations, Committee participants expressed concerns about the pace of inflation’s return to 2 percent. Wages are rising, as noted above, but not at a pace that would provide much upward impetus to inflation. Moreover, weaker global growth may continue to hold inflation down around the world.”
He signaled concern about inflation expectations as well. In line with the change in language in the statement, he noted that “Market-based measures of inflation compensation have moved down since our May meeting.”
During the Q&A, he returned to the topic of falling market-based measures of inflation expectations and noted that this was “one of several reasons why it feels to us that the case for more accommodation has strengthened. So, we find that notable.” And while the statement continued to say that survey-based measures of inflation expectations “are little changed,” he went beyond that in his press conference, saying that, “some survey-based expectations measures are near the bottom of their historic ranges.” All in all, “Combining these factors with the risks to growth already noted, participants expressed concerns about a more sustained shortfall of inflation.”
Powell was asked about the “pros and cons of a 50-basis-point cut [as opposed to a smaller move] and how you approach that question.” But he didn’t bite: “On the specific question of that, that’s just something we haven’t really engaged with yet, and it will depend very heavily on incoming data and the evolving risk picture as we move forward.”
Perhaps one of the most interesting questions was related to the balance sheet. Powell gave a strong indication that if a rate cut happens before the planned end of balance sheet runoff (if we see a July cut) then the FOMC would immediately cease runoff: “we’ll always be willing to adjust balance sheet policy so that it serves our dual mandate objectives.”
The Macro Projections
The changes to the macro projections were no surprise. The median growth projections were hardly changed at all. The median path of the unemployment rate was marked down a tenth in each year, as was the longer-run unemployment rate. The projections continue to show comfort with a slight rise in the unemployment rate over the forecast horizon. Powell said that there are no “real signals that we’re at maximum employment.”
The inflation projections were marked down quite sharply. Inflation is now projected to first reach its 2% objective in 2021. Core PCE inflation this year was revised down two tenths, to 1.8%. And, even with participants assuming a more accommodative path of the fund’s rate, core PCE inflation in 2020 was marked down a tenth, to 1.9%.
The median dots for 2019 continued to imply no moves. But eight participants (only one short of the nine needed to shift the median lower) now project policy easing this year. Of those, all but one projection the cumulative amount of easing to be 50bps. So, even though the 2019 median didn’t change, the mean fell by more than 25 basis points, suggesting that at least one rate cut is likely this year. As we also highlighted above, Powell doubled down on the dovishness of the dots in his press conference, adding that “a number” who “wrote down a flat rate path” thought “the case for additional accommodation has strengthened since” the May meeting. In other words, the dots understate the shift toward an easing bias.
Beyond 2019, the dots get a little odd, frankly. The median path doesn’t show a cut in 2019 but does show one in 2020 thanks to one additional policymaker projecting a rate cut in that year. That means that the median dot for 2020 is now 50 basis points lower than in March when the median path included a hike in 2020. Those who advocated easing in 2019 did not seem to see additional easing in 2020 as necessary.
The 2021 median indicates that the projected cut in 2020 will be reversed. One interpretation is that any policy cuts would be temporary and short-lived, and do not necessarily represent the start of a sustained easing campaign all the way to the zero lower bound. Powell alluded to “insurance cut” logic, noting that “an ounce of prevention” is a “valid way” to interpret current policy.
The cut or cuts in the dots appear to be seen as a recalibration to sustain the expansion, and once concern about a still-sharper decline in economic activity has dissipated and inflation has returned to 2%, it will be time to return to a more neutral funds rate. It is interesting, however, that the projected rate increase occurs amid a rise in the unemployment rate.
The mean projections portray a similar trajectory. Mean projections through the forecast horizon suggest a rate cut in 2019, followed by very modest policy tightening over 2020 and 2021.
The longer-run dot edged down to 2.5%, as we have expected for a while. The lowest longer-run dot has fallen to 2.375%. The downward shift in the longer-run dots helps to explain why the macro projections were so little changed despite the significantly lower projected path of the fund’s rate.
Median of Projections of FOMC Participants
Source: LH Meyer and Federal Reserve.
Projections of inflation and growth in real gross domestic product (GDP) are for
periods from the fourth quarter of the previous year to the fourth quarter of the
year indicated. Projections for the unemployment rate are for the average civilian
unemployment rate in the fourth quarter of the year indicated.