On Thursday, we issued a Change in the Call to reflect that we now think the first cut (25 basis points) will happen in September, followed by another cut (also 25 basis points) in Q1:2020. We were motivated to move up the expected timing of the first-rate cut by several reinforcing factors, including the soft inflation data, the disappointing domestic spending data, a weak global economic backdrop, the recent escalation in China-U.S. trade tensions, and the tightening in financial conditions that have accompanied these developments. President Trump’s announcement on Friday of tariffs on all goods imported from Mexico (5% beginning June 10, increasing to 25% by October) came after we’d already changed our call, but we see it as consistent with this earlier projected first rate cut.
This week, as part of its review of monetary policy strategy, tools, and communications, the Fed is holding a research conference in Chicago. Fed policymakers are on the official agenda only as hosts and moderators.
We interpreted Clarida’s speech (May 30) as suggesting that risks were tilted to the downside and that he sees a bias toward easing. He said that an increase in downside risks could suffice to warrant a cut: “If the incoming data were to show a persistent shortfall in inflation below our 2 percent objective or were it to indicate that global economic and financial developments present a material downside risk to our baseline outlook, then these are developments that the Committee would take into account in assessing the appropriate stance.” (Click here for our full commentary.) He further noted: “if we saw a downside risk to the outlook, then that would be a factor that could call for a more accommodative policy.” He warned: “The inflation data had just been softer. We think that a lot of that may be transitory. But the reality is that has been softer.”
Other policymakers continued to adhere to the symmetric, patient policy stance. Daly (Jun. 2) said, “patience is appropriate.” She has “some confidence” inflation will improve as the economy grows at a “strong pace.” However, she said if growth slowed sharply and inflation did not look like it would recover sustainably, then the FOMC would have to discuss a potential rate cut. Even Kashkari, who is seen as very dovish, said he is “not quite there yet” on the necessity of a rate cut. Quarles (May 30) seemed to suggest that financial stability concerns would not be a hurdle for rate cuts, saying, “monetary policy should be guided primarily by the outlook for unemployment and inflation and not by the state of financial vulnerabilities.”
Williams (May 31) commented only generally about optimal strategy in the face of the zero lower bound, noting that “short-term rates should be cut aggressively when deflation or a severe downturn threatens,” without reference to the current circumstances. Also, “short-term rates should be kept ‘lower for longer as the economy recovers” and “the ZLB is likely to be an even more powerful force” with r-star being so low.
The imposition of further tariffs on imports from China and President Trump’s announcement of tariffs on all goods imports from Mexico caught the attention of some policymakers. Daly saw “small upward pressure on inflation” as a result but did not see passthrough yet. Kashkari warned of adverse effects on business confidence.
The recent yield curve inversion was also a topical issue. Daly noted that the inversion hasn’t been “sustained and deep,” so it does not signal recession. To her, the long end is being depressed by lower projected GDP growth and flight-to-quality flows. Clarida wants to “distinguish between a flat curve and a curve that is inverted and remains inverted for a period of time.” As of Thursday, “We really haven’t seen [a persistent inversion] yet.”
|Source||Current||One Week Ago||Two Weeks Ago|
|Atlanta Fed GDPNow||1.3%||1.3%||1.2%|
|New York Fed Staff Nowcast||1.5%||1.4%||1.8%|
BEA made only minor revisions to Q1 real GDP. Overall real GDP growth was marked down a tenth, to 3.1%, and the story remains that final private demand was weak in Q1, with strong positive contributions from inventories, net exports, and government consumption and gross investment boosting real GDP growth to such a strong rate. The annualized core PCE inflation rate in Q1 has marked down three tenths, to 1.0%. The downward revision to core PCE prices in Q1 resulted in the 12-month core PCE inflation rate for March being revised down a tenth, to 1.5%, but a solid gain in core PCE prices in April brought the 12-month rate up to 1.6%.
There were modest positive surprises last week, including the April goods trade and inventory data as well as an upward revision to real consumer spending in March, but the incoming data continue to suggest that real GDP growth slowed substantially in Q2. This morning’s construction spending report included upward revisions to the Q1 monthly data but showed that construction spending was flat in April, with a strong gain in public construction offsetting a decline in private construction spending that extended across both the residential and nonresidential categories.
A couple of important measures of consumer sentiment released last week remained at very high levels in May. The Conference Board index posted a strong increase, but it reflected data collected only through mid-May, and therefore likely do not fully reflect the escalation in China-U.S. trade tensions that occurred around that time. The final Michigan survey results for April indicated that, while confidence remains at high levels, recent trade development are affecting consumer attitudes. The press release noted that “confidence significantly eroded in the last two weeks of May. The late-month decline was due to unfavorable references to tariffs, spontaneously mentioned by 35% of all consumers in the last two weeks of May, up from 16% in the first half of May and 15% in April and equal to the peak recorded last July in response to the initial imposition of tariffs.”
|Release||Period||Actual||Consensus||Revision to Previous Release||Previously Released Figure|
|FHFA House Price Index MoM||Mar||0.1%||0.2%||0.4%||0.3%|
|S&P CoreLogic CS 20-City YoY NSA||Mar||2.68%||2.50%||2.95%||3.00%|
|Conf. Board Consumer Confidence||May||134.1||130.0||—||129.2|
|GDP Annualized QoQ||1Q S||3.1%||3.0%||—||3.2%|
|Personal Consumption QoQ||1Q S||1.3%||1.2%||—||1.2%|
|GDP Price Index||1Q S||0.8%||0.9%||—||0.9%|
|Core PCE QoQ||1Q S||1.0%||1.3%||—||1.3%|
|Advance Goods Trade Balance||Apr||-$72.1b||-$72.7b||-$71.9b||-$71.4b|
|Retail Inventories MoM||Apr||0.5%||0.2%||—||-0.3%|
|Wholesale Inventories MoM||Apr P||0.7%||0.1%||0.0%||-0.1%|
|Pending Home Sales MoM||Apr||-1.5%||0.5%||3.9%||3.8%|
|Personal Income MoM||Apr||0.5%||0.3%||—||0.1%|
|Real Personal Spending||Apr||0.0%||0.0%||0.9%||0.7%|
|PCE Prices MoM||Apr||0.3%||0.3%||—||0.2%|
|PCE Prices YoY||Apr||1.5%||1.6%||1.4%||1.5%|
|Core PCE Prices MoM||Apr||0.2%||0.2%||0.1%||0.0%|
|Core PCE Prices YoY||Apr||1.6%||1.6%||1.5%||1.6%|
|U. of Mich. Sentiment||May F||100.0||101.5||—||102.4|
|U. of Mich. 5-10 Yr Inflation||May F||2.6%||—||—||2.6%|
|Construction Spending MoM||Apr||0.0%||0.4%||0.1%||-0.9%|