Sticking to the “Material” Guidance

Powell will testify before the Joint Economic Committee on Wednesday and before the House Budget  Committee on Thursday. We expect his prepared remarks to mirror the guidance that he and his colleagues have provided already: It would take a “material” reassessment of the outlook for the FOMC to reconsider the appropriate stance of monetary policy. We see that as a high bar for a December rate cut, in part because it is already widely expected that GDP growth will slow at least somewhat in Q4. In addition, recent reductions in downside tail risks related to Brexit and the U.S.-China trade dispute have been sustained. Indeed, recently there has been some optimism that a phase one deal between the U.S. and China might have a greater scope,  perhaps including rollbacks of previous tariff increases. 

Policymaker Remarks 

In their public remarks, policymakers continued to reinforce Chair Powell’s core message from the last FOMC  meeting. FOMC participants seem quite comfortable with the stance of monetary policy and much more united than we’ve seen in some time. Williams (11/8) said, “The economy is in a good place. Monetary policy, I  think, is well-positioned right now, through these adjustments,” but “risks are somewhat tilted to the  downside.” He thought that U.S. interest rates are “actually just modestly below neutral” and “we can have  3.5% unemployment without creating inflation.” He also warned that “using monetary policy to address a  sectoral imbalance has huge costs to the rest of the economy.” 

Barkin expected the recent rate cuts to be sufficient to mostly offset the headwinds facing the economy:  “We have decided to take rates down 75 basis points to protect against weakening coming from this uncertainty. So if we get either no weakening or the modest kind of weakening that we expect, then I think  we have taken out the insurance that we would take” (11/5). Evans thought the current policy was “definitely”  accommodative but was concerned about inflation (11/6). His interpretation of “material” seemed to be, “if  there was a big negative shock, we would have to respond.” He also said he would be “comfortable with  2.5% inflation.” Kashkari said something along the same lines: “We’ve been undershooting inflation for  basically six or eight years, so why don’t we commit not to raise rates until we actually achieve that?” (11/5).  Bostic thought that the three recent cuts are enough for now and was worried about retaining enough policy space for use in the future (11/8). He said he would have dissented in October if he had had a vote. He wanted a pause “over the coming months.” Kaplan thought the current stance was appropriate (11/5). Daly concurred with the Committee guidance: “It would take a material change in the outlook for me to think that further accommodation would be required” (11/4). 

Clarida gave a speech earlier today discussing the reasons longer-term bond yields have fallen (11/12). He discussed reasons for the declines in each of the major components—expected inflation, expected short-term real rates, and the term premium. He gave three reasons for the decline in the term premium: lower inflation  volatility, LSAPs, and “the value that bonds have provided over the past 20 years as a hedge against equity  risk.” The last he described as a “much less widely appreciated” factor than the first two. 

Nowcasts (2019:Q4) 

Source Current One Week Ago
Atlanta Fed GDPNow 1.0% 1.1%
New York Fed Staff Nowcast 0.7% 0.8%
CNBC/Moody’s Survey 1.5% 1.5%

Recent Data 

The ISM non-manufacturing index increased in October from a September level that was a multi-year low,  with all of the major subcomponents seeing increases. However, it remains well below levels seen last year and into early 2019. 

Nonfarm productivity was weak in Q3, declining at a 0.3% rate. That brought the four-quarter change down to 1.4%, from 1.8%. Hours worked advanced at a 2.4% rate, the fastest pace since 2017:Q4, while output grew at a moderate 2.1% rate. The weak productivity print plus a solid increase in compensation resulted in rising unit labor costs. The four-quarter change in unit labor costs had fallen to 1.0% in 2018:Q4 but have risen steadily since then, reaching 3.1% in the most recent quarter. 

The preliminary results of the Michigan survey for November showed that consumer sentiment was little changed. The median measure of longer-term expected inflation from that survey was 2.4%, up a tenth from the final October print and up to two tenths from the preliminary October print. 

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Core Capital Goods Orders MoM Sep F -0.6% — — -0.5%
Core Capital Goods Shipments MoM Sep F -0.7% — — -0.7%
Trade Balance Sep -$52.5b -$52.4b — -$54.9b
ISM Non-Manufacturing Index Oct 54.7 53.5 — 52.6
Nonfarm Productivity QoQ 3Q P -0.3% 0.9% 2.5% 2.3%
Unit Labor Costs QoQ 3Q P 3.6% 2.2% 2.4% 2.6%
Wholesale Inventories MoM Sep F -0.4% -0.3% — -0.3%
U. of Mich. Sentiment Nov P 95.7 95.5 — 95.5
U. of Mich. 5-10 Yr Inflation Nov P 2.4% — — 2.3%

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