Some Improvement in Risk Picture Won’t Stop October Rate Cut

There’s been an improvement in the outlook concerning two key sources of risk, Brexit and U.S.-China  tensions. However, we continue to see a 25-basis-point funds rate cut at next week’s FOMC meeting as highly likely. While the risk of further escalation on both fronts seems to have diminished, policymakers are also concerned about the impact of what’s already happened, and recent incoming data have been mixed.  Recently, some FOMC participants have expressed reservations about continuing to cut at each meeting indefinitely, but their concerns seem to be less about an October cut than about taking back control of the messaging. Perhaps most important is that the market overwhelmingly expects a cut and Clarida did not push back against those expectations when he spoke on Friday, just before the start of the blackout period for Fed communications ahead of next week’s meeting. 

Policymaker Remarks 

Williams (10/17) advocated “a meeting-by-meeting approach of looking at where the economy is.” He  acknowledged there was a lot of uncertainty with “some improvements on some margins.” Clarida (10/18)  used similar wording. He said the FOMC is “not on a preset course” and “will proceed on a meeting by meeting basis.” He warned, “Global growth estimates continue to be marked down, and global disinflationary  pressures cloud the outlook for U.S. inflation.” 

Daly (10/15) said, “In terms of what to do going forward, I would like to see additional data because I think  the economy is in a really good place right now.” She saw “the economy in a good place and healthy accommodation in a good place,” Kaplan (10/18) said “I felt very strongly at this stage in July and September that we should be taking action. I’m more agnostic as we sit here today as to whether we should take, or I  should take more time, understanding we have the December meeting also, and that’s a judgment I’ll make  as I walk into the October meeting.” 

While Evans had assumed no further easing this year in the projections he submitted at the last FOMC  meeting, in recent remarks he has seemed open to another cut. He said (10/16), “I could imagine making a  full-throated case that we should have a more accommodative policy” to bolster the inflation outlook. He called  recent data on inflation expectations an “unwelcome development.” Kashkari (10/18) said the incoming data since the last FOMC meeting had disappointed. He said: “I will likely be in favor of cutting interest rates in  October. But I don’t know how low we have to go — it really is going to depend on how the data comes  out.” In contrast, George (10/18) continued to advocate pausing immediately: “My own outlook for the  economy does not call for a monetary policy response.” 

The reserve-management purchases program continued to be a focus of a couple of participants. Williams said they will change “the technical details of our approach over time as appropriate. One of them obviously  could be to buy other shorter-term Treasury securities besides T-bills.” He added that the framework  functioned well when reserve levels were “at least as large as we saw during summer and into early  September.” He didn’t see the program as disrupting the T-bill market. Clarida said purchases will “concentrate on” bills. He drew a contrast between the Fed’s purchases of long-term Treasury securities and MBS under the LSAPs/QE programs and the focus on bills under the current reserve-management initiative. Evans (10/16)  

explained, “We’re not taking duration out of the market the way we did with QE. That’s why we say it’s not  really QE.” Recent strains were “evidence that our balance sheet probably is about where it — we need to  augment it somewhat.” He expressed hope that a standing repo facility could help alleviate that strains. 

A couple of policymakers pointed to the concentration of reserves and individual bank behavior as factors in recent strains. Evans said, “reserves are concentrated in a small number of the larger banks.” Kashkari (10/14)  went further and noted that the discount window is always available: “They don’t like it because they think it makes them look weak. They don’t want to use it so the New York Fed should have run to comfort them more quickly with a new facility…That’s called the height of entitlement if ever there was one.” He continued,  “Banks are supposed to plan for their own liquidity needs. They did not do that adequately. And now they’re  complaining because they failed to plan.” 

Nowcasts (2019:Q3) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 1.8% 1.7% 1.8%
New York Fed Staff Nowcast 1.9% 2.0% 2.0%
CNBC/Moody’s Survey 1.5% 1.7% 1.7%

Recent Data 

A couple of key reports disappointed last week: September retail sales and industrial production. After a series of strong prints, sales in the retail control group—which includes only those categories of retail sales that are direct inputs into the PCE data—were flat in September. Industrial production declined 0.4% in September,  with manufacturing output declining 0.5%. Some of that weakness is related to a recent UAW strike, the effects of which were reflected in a 4.2% decline in output of motor vehicles and parts. The incoming economic data weren’t all poor, however. In particular, there was some welcome news concerning housing. The NAHB housing market index continues to trend higher, increasing further in October. And while overall housing starts and permits declined more than the consensus in September, the more volatile multifamily components were responsible for the weakness. Both single-family starts and permits rose.

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Retail Sales Advance MoM Sep -0.3% 0.3% — 0.4%
Retail Sales Control Group MoM Sep 0.0% 0.3% — 0.3%
NAHB Housing Market Index Oct 71 68 — 68
Business Inventories MoM Aug 0.0% 0.2% 0.3% 0.4%
Building Permits MoM Sep -2.7% -5.3% 8.2% 7.7%
Housing Starts MoM Sep -9.4% -3.2% — 12.3%
Industrial Production MoM Sep -0.4% -0.2% 0.8% 0.6%
Manufacturing (SIC) Production MoM Sep -0.5% -0.3% 0.6% 0.5%
Capacity Utilization Sep 77.5% 77.7% — 77.9%

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