Last week’s incoming economic data were generally upbeat, but nothing that would derail a consensus for a 25-basis-point rate cut in July. Comments from Williams and Clarida shortly before the start of the blackout period for communications ahead of next week’s meeting stoked speculation that there might be a larger cut, but we now see little chance of that after the New York Fed took the very unusual step of pushing back against the interpretation that his comments were a signal about near-term policy actions. Our call is that the FOMC will cut the fund’s rate target 25 basis points in July.
The interpretation of Williams’ and Clarida’s remarks on Thursday (7/18) as a dovish signal was more about the context of their remarks than the content: Two key policymakers speaking shortly before the blackout, at a time when markets were already expecting a 25-basis-point cut, with some smaller chance of a larger cut priced in as well. We took that as a sign that the FOMC might well ease 50 basis points at next week’s meeting. However, following an unusual subsequent official clarification from the New York Fed, it appears that it will be a 25-basis-point cut after all. In Williams’ speech, he instructed: “First, take swift action when faced with adverse economic conditions. Second, keep interest rates lower for longer. And third, adapt monetary policy strategies to succeed in the context of low r-star and the ZLB.” The New York Fed later argued that his speech was academic and “not about potential policy actions.” This was likely pushback to the interpretation that his speech strongly leaned on the side of a larger (50 basis point) rate cut. During Q&A, Williams was asked specifically about near-term policy. He expressed concern that soft inflation expectations are “somewhat worrisome given the otherwise strong U.S. economy.” He continued: “My concern is inflation expectations can get anchored too low, and we may be seeing that, have seen that in other countries.” Speaking later in the day, but before the New York Fed clarification, Clarida (7/18) said “under the ideal monetary policy you adjust policy to keep the economy on an even keel.” He strongly felt “You don’t want to wait” for a downturn before responding with appropriate policy.
Setting aside the clamor over Clarida and Williams’ remarks, the sense from other policymakers’ comments was that there remained a range of views but that most were comfortable with a 25-basis-point cut at the July meeting. Bullard (7/19) reiterated his preference “to go 25 basis points at the upcoming meeting.” He dissented at the June meeting in favor of an immediate rate cut. He cited risk management considerations. Kaplan (7/16) expressed more openness to a rate cut, calling it an “adjustment in the policy rate in light of market-determined rates.” In his mind, it would be “more tactical than strategic.” Powell (7/16) continued to advise that the Fed would “act as appropriate.” He did not push back against prevailing market expectations of a July cut.
Evans (7/16) stood out as one of the only policymakers (along with Kashkari) favoring a July cut of 50 basis points instead of 25 basis points: “There is an argument that if I think that it takes 50 basis points before the end of the year to get inflation up, then something right away would make that happen sooner.” If the July cut is only 25 basis points, he would advocate another rate cut this year.
Others were unconvinced of the merits of a near-term rate cut at all. Rosengren (7/19) thought “The economy’s doing quite well, we’re not having an economic slowdown” and noted, “As long as the economy’s doing well, if that continues, we don’t need accommodation.” He warned that a so-called insurance cut comes with costs and could endanger financial stability. Bostic (7/18) minimized the issue of yield curve inversion: The shape merely says “there’s a belief that there’s a lot more risk out there. I need to understand where that risk is.” He cautioned, “I think it’s important for us to stay grounded in the real economy.” George’s outlook hasn’t changed (7/17) but she was attentive to weak investment: “I am watching carefully business investment. We are in a slump right now.” She cited the 2015-2016 episode: “we also had a manufacturing slump, we had a strong dollar and responding to that in the face of a consumer continuing to grow was not necessary.”
Even with a presumed July rate, there was little appetite to adjust balance sheet runoff plans as a result. Bullard noted: “That’s all been priced into markets already, so I don’t really see any reason to revisit that decision or change that decision at this point, even if we decide to lower the policy rate at this particular meeting.”
|Source||Current||One Week Ago||Two Weeks Ago|
|Atlanta Fed GDPNow||1.6%||1.4%||1.3%|
|New York Fed Staff Nowcast||1.4%||1.5%||1.5%|
|Release||Period||Actual||Consensus||Revision to Previous Release||Previously Released Figure|
|Import Price Index MoM||Jun||-0.9%||-0.6%||0.0%||-0.3%|
|Import Price Index YoY||Jun||-2.0%||-2.3%||-1.1%||-1.5%|
|Retail Sales Advance MoM||Jun||0.4%||0.2%||0.4%||0.5%|
|Retail Sales Control Group MoM||Jun||0.7%||0.3%||0.6%||0.5%|
|Industrial Production MoM||Jun||0.0%||0.1%||—||0.4%|
|Manufacturing (SIC) Production MoM||Jun||0.4%||0.3%||—||0.2%|
|Business Inventories MoM||May||0.3%||0.3%||—||0.5%|
|Housing Starts MoM||Jun||-0.9%||-0.7%||-0.4%||-0.9%|
|Building Permits MoM||Jun||-6.1%||0.1%||0.7%||0.3%|
|Philadelphia Fed Business Outlook||Jul||21.8||5.0||—||0.3|
|U. of Mich. Sentiment||Jul P||98.4||98.8||—||98.2|
|U. of Mich. 5-10 Yr Inflation||Jul P||2.6%||—||—||2.3%|
The June retail sales report surprised well to the upside. Sales in the control group—which includes only those categories of retail sales that are direct inputs into the PCE data—advanced 0.7% in June, well more than expected, and gains in previous months were revised up. It now appears that real consumer spending rebounded to a pace of 4% in Q2. Industrial production was flat in June, held down by a sharp decline in utilities, but manufacturing output posted a solid gain. There was more hopeful news for manufacturing later in the week, as the results for the Philly Fed’s regional July manufacturing survey were surprisingly strong. As for the housing starts and permits data for June, there were declines in both overall starts and permits, but both were driven by large decreases in the more volatile multifamily category. Finally, the preliminary results of the July Michigan survey of consumers showed a pickup in the measure of longer-term inflation expectations, from 2.3% to 2.6%.