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Preview: September 17-18 FOMC meeting outcome not likely to satisfy those looking for more and faster rate cuts

When Fed policymakers meet on Tuesday and Wednesday of this week, the expected result is another cut in short term rates to provide a cushion at a time when growth is sluggish and the outlook more uncertain. In the context of the dual mandate – maximum employment and price stability – it could be difficult to argue that such a cut is necessary.

  • Statement and Summary of Economic Projections materials at 14:00 ET
  • Chair Jerome Powell’s press briefing at 14:00 ET
  • End of communications blackout period at 24:00 ET (midnight) Thursday, September 19

Even if payroll growth has lost momentum, it is by no means weak. The unemployment rate remains near 50-year lows and sufficient to bring into the workforce those who might otherwise remain on the margins. Layoff activity is somewhat higher, and employment for part-time reasons is also up along with increases in temporary employment. Some of these reflect caution on the part of businesses as they seek to assess the direction of the economy.

Recent data on inflation suggests that prices pressures are slowly reasserting their influence. By some measures, inflation is inching back toward the Fed’s 2% objective. Consumer inflation expectations remain anchored, if low. Market-based measures of inflation compensation may be harder to interpret at a time when Treasury yields have declined rapidly.

If it were only the economic data, policymakers’ balanced approach to monetary policy would argue that no change in rates was needed at present. However, as the July 31 FOMC statement and Chair Jerome Powell’s subsequent press briefing made clear, a majority of FOMC voters preferred to provide a little extra accommodation to ensure that the expansion does not falter. While some of the risks that drove the split decision – two voters dissented – have moderated of late, others have emerged. Improved chances of a trade deal with China along with a few short-term concessions relieve some risks. On the other hand, the attack on Saudi Arabian oil production introduced a wild card on what will happen with supply just in time for cooler weather and greater demand for heating fuels. There are ongoing risks with the looming possibility of a hard Brexit. Growth in global economies was weakened and many central banks are adding accommodation or signaling that they are prepared to do so.

The FOMC is not going to overreact to recent events, but the consensus may be more in favor of providing another increment of accommodation to smooth over any bumps in the economic road. Being in the communications blackout period, policymakers cannot publicly signal a change of perspective on their outlook for rates. I would not be surprised if there were no dissents in the vote this time around in order to convey that a unified FOMC is ready to respond to developments in spite of some reluctance to cut rates on the part of a few voters. There may be some talk of a 50 basis point cut rather than the more likely 25 basis points. The possibility is greater, but the consensus is probably not going to feel it is warranted. Doing so a larger cut would almost certainly spark dissent in the vote – most likely from Kansas City Fed President Esther George. At the same time, lack of a 50 basis point cut could ensure the dissent of one voter – St. Louis Fed President James Bullard. Indeed, it is not impossible that there could be a dissent from both with opposing views.

For a history of FOMC interest rate decisions and votes, or for a compilation of texts accompanying rate decisions, please see the Whetstone Analysis Reference Library.

When the statement and Summary of Economic Projections (SEP) materials are released at 14:00 ET on Wednesday, it will be possible to better assess just how much more downbeat the Committee is on economic conditions from the prior meeting. There’s little reason to think at consumer spending is suffering, but business investment remains largely absent. Residential real estate isn’t doing badly, while commercial real estate is soft. A softer global economic performance and unsettled US trade policy have led to uneven export activity that is trending lower along with weaker imports, and the trade deficit growing deeper. Powell has tried to convey that the FOMC is giving thought to the impact of trade and trade policy on the economy without being perceived as bowing to political pressure or trying to fix the problems generated by mercurial trade policy.

The SEP does not generally reflect more than marginal changes of policymakers’ forecasts. This time around could be slightly more dramatic at the edges, but the center probably won’t change much. On September 6 Powell firmly stated that the FOMC is not forecasting a recession. Data in the interim period should not alter that outlook. However, the forecasts could be a tad more generous with the prospect of future rate cuts.

Powell’s session with the press at 14:30 ET on Wednesday will be another tough one. I anticipate that the SEP’s contents will be the greatest source of questions, especially if it does not reflect a pickup in the pace of rate cuts and/or slower growth. Why the Fed is relatively optimistic about the economy at a time when the risks are feeling more evident will be the main point.

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