A look behind at the October 7 week leaves the impression that if Fed policymakers were increasingly pessimistic at their last meeting that the risks facing the US economy are going to be favorable resolved, then the recent economic data is not going to persuade them otherwise by the time of the next deliberations.
The bottom lines from the minutes of the September 17-18 FOMC meeting are:
- The FOMC saw greater risk of recession and that the risks that have plagued the economic outlook haven’t gone away, and some have gotten worse.
- The Committee was divided on the necessity of a rate cut, but the majority thought one was appropriate. Two participants thought the 25 basis points wasn’t enough.
- The consensus is inclined to another cut at the October 29-30 deliberations, but is not on a preset course. If the economic data in the period between the September 17-18 meeting and the next had shown some improvement, it would have been more doubtful. But recessionary conditions in the manufacturing sector and a service sector sliding in that direction will probably convince policymakers another cut is needed soon, especially if they think that a fourth might be necessary at the December 10-11 meeting.
- Division on the FOMC pits those who are worried about inflation and defending the credibility of the inflation target against those concerned about providing unneeded accommodation and producing financial imbalances. Everyone is concerned about maintaining the expansion but placing different emphasis on the data and developments. However, the inflation data for September released during the October 7 week suggests the FOMC may need to provide some accommodation to address low inflation and softening inflation expectations.
- The cash crunch that led to the FRBNY having to do overnight repos gave the FOMC reason to consider setting up a routine facility for these sorts of operations as part of a normal balance sheet expansion in an ample reserves environment. These buys would not be asset purchases to provide accommodation.
- In reviewing the monetary policy framework, it is likely that the FOMC will deploy forward guidance and/or asset purchases sooner and more aggressively with short term rates near the effective lower bound (ELB).
- Wrestling with how to communicate the FOMC’s symmetric approach to price stability, i.e. going to a target range (possibly with a mid-point above 2%) or using inflation price targeting.
Given the warning in the minutes, it should not have been too surprising that the FOMC instructed the New York Fed to start buying Treasury bills as of October 15 and to continue to do so through the second quarter 2020. The string of overnight and term repurchase operations that began in mid-September to address a cash crunch will now continue at least through January 2020. This is essentially establishes the facility mentioned in the minutes. Again, this is routine stuff to administer interest rates in an ample reserves environment, not specific monetary policy actions to provide accommodation via the balance sheet.
For a history of the Fed’s Large Scale Asset Purchase Programs – so-called QE – please see the Whetstone Analysis Reference Library.
While public remarks from Fed Chair Jerome Powell did not promise more rate cuts at future meetings, he did reiterate that the FOMC would act to maintain the expansion. Given the signs of easing in the labor market – at least on the margins – and tame inflation data, falling consumer inflation expectations, and cracks in business and consumer confidence, it seems likely.
The data on Job Openings and Labor Turnover (JOLTS) for August was by no means weak in the historical context. However, it did suggest that job openings were at an 18-month low and that the pace of hiring was slower. Layoffs remained low and voluntary job quits were only just off record highs. There is a sense that the labor market has peaked and lost momentum.
Jobless claims data through the week ended October 5 were still consistent with a vibrant labor market and hadn’t shown inroads from the UAW strike as yet. Nonetheless, that isn’t likely to remain the case the longer the strike goes on. It started mid-September and doesn’t show any immediate indication of a resolution. The fact that it has lasted through the end of the October survey period for the upcoming October Employment Situation means that nearly 50,000 manufacturing workers will be subtracted from the payroll data when it is reported at 8:30 ET on Friday, November 1.
The three reports on inflation – Final Demand PPI, CPI, and the Import Price Index – all told pretty much the same story for September. Mild increases in food costs were more than offset by declines for energy, particularly for gasoline costs. Commodities prices are still providing little or no upward pressure, while services remain the main source of higher costs. Inflation at the core is tame and readings are low enough that the FOMC has room to increase interest rate accommodation, if it chooses to do so.
What may be more concerning to the FOMC is that consumer expectations for inflation fell again in early October. The 1-year measure of inflation expectations in the University of Michigan Survey of Consumers declined three-tenths to 2.5%. It is a larger month-over-month change than usual and to the downside, although it remains at the low end of recent readings. However, the 5-year inflation expectations readings – which is more analogous to the Fed’s medium term – fell two-tenths to 2.2%, a record low. This could well be revised up a bit in the final report at 10:00 ET on Friday, October 25. Nonetheless, policymakers are going to be concerned that inflation expectations not only are too low, but could be persistently weak in a way that threatens growth.
The University of Michigan’s preliminary Consumer Sentiment Index for October managed to climb a bit further from the near-term low of 89.8 in August to 93.2 in September to 96.0. This is quite a healthy level of confidence, but it is still among the lower readings of the past year and points to a more cautious view of the future even while the present looks good.
Similarly, the NFIB’s Small Business Optimism Index declined to 101.8 in September after 103.1 in August. The index level is consistent with times in which uncertainty is higher and caution prevails in planning and expectations. Survey respondents are not pessimistic, but they are less willing to invest and expand at the moment.
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