Support for Near-Term Easing Strong But Not Unanimous

The major monetary policy events last week were the FOMC minutes from the June meeting (note) and  Powell’s semiannual testimony, which included both his prepared remarks (note) and two days of Q&A (note).  All three reinforced our conviction that the FOMC will cut the fed funds rate at its July 31 meeting despite some policymakers voicing reservations about the need for near-term easing. Much as Powell did at his press conference after the June FOMC meeting, the minutes suggested that the main reason they didn’t go ahead and cut immediately in June was simply the recency of various developments. The overwhelming sense was that six more weeks—the amount of time until the July meeting—would be enough of a wait. In his testimony last week, Powell no longer talked about the recency of certain developments and chose not to push back whatsoever on market expectations that a July rate cut is a near-certainty. 

Policymaker Remarks 

Policymakers continued to be divided on the urgency of a near-term rate cut, although we believe that they will ultimately agree on a 25-basis-point cut at the July meeting. Although they generally pointed to a modal forecast of continuing economic growth, they were palpably worried about downside risks. They called attention to business investment and confidence. Soft inflation and inflation expectations were also a major concern. 

Both Powell and Williams strongly hinted that they support a near-term rate cut. Williams (Jul. 11) said,  “Really what we want to do is extend this expansion, and have a monetary policy in the right place to do that”  and warned of a vicious negative feedback loop from disinflation. He added, “I still think that the uncertainties  around trade negotiations, global growth, haven’t improved in the same way…Really, I don’t see the  uncertainties have significantly shifted to the positive” 

Governors Brainard and Quarles also appeared to be on board with easing in the near term. Brainard (Jul. 11)  said: “Taking into account the downside risks at a time when inflation is on the soft side would argue for  softening the expected path of monetary policy according to basic principles of risk management.” Quarles  (Jul. 11) suggested it was important for the Fed to consider the implications for the U.S. outlook of a weak global economic outlook: “The U.S. economy currently, it’s in a very strong position. On the other hand, there  are some significant risks out there and part of our job at the Fed is to think about what are those risks…The  case for continued global growth is not as strong as the data around the United States, and that will have  effects on us.” 

Regional Fed presidents expressed a wider range of views, with some expressing reservations about a near-term cut. Barkin (Jul. 11) said, “With unemployment so low and consumer spending so healthy, it’s equally  hard to make a case for stepping on the gas,” but he also noted that the “roller coaster for business confidence  continues.” Bostic acknowledged he was skeptical about the need for a July cut (Jul. 11) but said he’s  keeping an “open mind.” Harker (Jul. 9) said, “There’s no immediate need to move rates in either direction at  this point.”  

Others were more convinced that a near-term cut is appropriate. Bullard (Jul. 10) continued to advocate a  small cut: “I would characterize it as taking out insurance against inflation that is stubbornly below target.”  Evans (Jul. 12) argument for easing policy was premised on soft inflation and inflation expectations: “Because  inflation expectations seem to me to be anchored a little bit below a level consistent with our 2% objective,  and it’s been stubborn like that, I think that tells me that our current setting for policy is a little bit on the  restrictive side.” He also said the “timing [of rate easing] is not critical.” Even George (Jul. 10), who has a  hawkish reputation, expressed flexibility on the issue of a hot labor market: “As estimates of the natural rate of  employment have declined, the scope for monetary policy to foster lower rates of unemployment without  generating inflationary pressures has increased.”  

Nowcasts (2019:Q2) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 1.4% 1.3% 1.5%
New York Fed Staff Nowcast 1.5% 1.5% 1.3%
CNBC/Moody’s Survey 1.5% 1.7% 1.8%

Recent Data 

The CPI and PPI report for June released last week were firmer than anticipated, suggesting that the 12- month core PCE inflation rate will be reported to have edged up to 1.7% in June when the data are released later this month.

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
NFIB Small Business Optimism Jun 103.3 103.1 — 105.0
Wholesale Inventories MoM May F 0.4% 0.4% — 0.4%
CPI MoM Jun 0.1% 0.0% — 0.1%
CPI YoY Jun 1.6% 1.6% — 1.8%
Core CPI MoM Jun 0.3% 0.2% — 0.1%
Core CPI YoY Jun 2.1% 2.0% — 2.0%
PPI Final Demand MoM Jun 0.1% 0.0% — 0.1%
PPI Final Demand YoY Jun 1.7% 1.6% — 1.8%
Core PPI MoM Jun 0.3% 0.2% — 0.2%
Core PPI YoY Jun 2.3% 2.1% — 2.3%

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