When the FOMC meets on Tuesday and Wednesday, October 29 and 30, it is by no means certain that the Committee will determine on cutting short-term rates for a third meeting in a row. In light of a decidedly softer tone in the recent economic data, it certainly seems probable. However, enough FOMC participants have recently reiterated that policy isn’t on a preset course, and that it might be appropriate to pause to assess the impact of the prior two rate cuts. Several policymakers – including Chair Jerome Powell – have recently said the US economy is in good shape with a strong labor market and low inflation. It is the assessment of risks to growth – and their severity and urgency – that might tip the balance of the vote in one direction or another.
See the Whetstone Analysis comment from October 20: Fed policymakers have a lot to mull over before deciding the next move at the October 29-30 FOMC meeting.
Whatever the outcome, the next FOMC meeting will almost certainly see another set of dissents. To review the recent ones:
- St. Louis Fed President James Bullard – dissented on June 19 in favor of a 25 basis point cut when no rate action was taken, and September 18 in favor of a 50 basis point cut when the FOMC lowered the fed funds target range by 25 basis points.
- Boston Fed President Eric Rosengren – dissented on July 31 and September 18 in preference for no cut at the time.
- Kansas City Fed President Esther George – dissented on July 31 and September 18 in preference for no cut at the time.
For a history of FOMC rate decisions, see the Whetstone Analysis Reference Library
It’s a tough call as to whether the economy actually needs more stimulus to get through the present period of sluggish growth. The labor market is strong. In spite of the downside surprise in the September retail sales data, consumers appear to be spending freely. Manufacturing is in a recession, while services are expanding, if at a humble pace. Confidence for consumers and businesses is down, but levels remain optimistic from an historical perspective. Inflation is low and inflation expectations are uncomfortably so, and probably enough to more than offset the vigor in the labor market in terms of a balanced monetary policy and convince a majority of the FOMC that a rate cut is needed. I anticipate the consensus will be that for another 25 basis point rate reduction to ensure that the expansion can eke out a few more months of lackluster growth until the risks and uncertainties facing the economy are resolved and/or inflation gets a boost. What would not surprise me is if the statement language suggested a pause to take stock of the effect of that and the prior two rate cuts. It may be less of a mid-cycle adjustment and more part of an easing cycle, but not one that is in a particular hurry.
- Statement and Implementation Note at 14:00 ET; no update to Summary of Economic Projections
- Chair Jerome Powell’s press briefing at 14:00 ET
- End of communications blackout period at 24:00 ET (midnight) Thursday, October 31
The language in the meeting statement is not expected to be much different from the one released on September 18. The Implementation Note that accompanies it may be a little lengthier than usual. The decision to buy Treasury bills through the second quarter 2020 and continue overnight and term repos into January 2020 was announced October 4. The FOMC will certainly confirm the details announced then and perhaps expand on it a bit. There may even be a separate formal announcement of the FOMC’s decision to establish “a standing repurchase agreement facility as part of the framework for implementing monetary policy”, as discussed in the minutes of the September 17-18 meeting.
Chair Powell’s press briefing is likely to be another difficult one. Communicating the subtleties of monetary policy is always a challenge. Doing so at a time when it is clear that the FOMC participants are unusually divided will make it harder. Powell will have to justify whatever the decision is – and it could be for a pause instead of the expected rate cut – and reconcile the ends of the policy spectrum. However, even St. Louis Fed’s Bullard has moderated his extreme dovishness of late and seems less inclined for aggressively adding accommodation. Similarly, Boston’s Rosengren may be more inclined to take out a little insurance for the expansion. I don’t think Kansas City’s George will do anything but dissent if there is another rate cut as she worries about financial imbalances developing.
The press is likely to focus on two main points. First, why isn’t the central bank more concerned about recession? Without an update to the Summary of Economic Projections (SEP) it may not be obvious that sentiment on the FOMC has shifted to a lower gear in regard to the economic outlook. Second, how is the buying of Treasury bills different from large scale asset purchases (LSAP or QE)? How are markets to distinguish between increasing the size of the Fed’s asset holdings for technical purposes and purchases undertaken to provide stimulus? Is there a distinction without a difference? Powell has come under criticism in his past few press briefings for lack of clarity. He will be under pressure to send an unambiguous message to markets that might be difficult to achieve.
As a footnote, this is one of the four meetings in a year at which the FOMC will get the Senior Loan Officer Opinion Survey. The survey doesn’t have an announced release schedule. It is normally published at 14:00 ET on the Monday after the meeting at which it was presented. It is likely the survey contents will reflect soft demand for business credit as many companies delay making investments in plant and equipment. On the other hand, consumer loan demand could be firmer as home sales start to pick up and consumers were generally more willing to spend in recent months.
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