– Consensus for 25 bp Cut in September Seemingly Intact, But Early or Larger Cut Doubtful
By Steven K. Beckner
(MaceNews) – When a disappointing July employment report and other worrisome economic indicators triggered a Wall Street sell-off, speculation mounted that the Federal Reserve would have to play catch-up and ease monetary policy more aggressively than planned, but comments by Fed officials this week have cast doubt on such presumptions.
Officials’ views vary but, by and large, they have taken a cautious, wait-and-see approach. They have indicated they are open to cutting short-term interest rates but they have not supported calls for an out-sized 50 basis point rate cut when the Fed’s rate-setting Federal Open Market Committee meets next month, or an inter-meeting move.
Their cautious comments seem to imply that the FOMC will be content to wait until its regularly scheduled Sept. 17-18 meeting, then cut the federal funds rate by just 25 basis points from the current 5.25% to 5.50% target range.
The final outcome, as always, will depend in part on key inflation, employment and other data that will be published in coming weeks. And how economic and financial conditions unfold will determine whether the FOMC decides to cut rates at each of its remaining meetings of 2024.
After the FOMC left rates unchanged at its July 31 meeting, Chair Jerome Powell said the Fed’s policy-making body was “getting closer” to “dial(ing) back the restriction in our policy rate” and that an initial cut in the federal funds rate would be “on the table” at the September meeting. He told reporters a 50 basis point reduction was not something he and his colleagues were then considering.
Two days later, the Labor Department reported a surprising jump in the unemployment rate to 4.3% along with a smaller than expected non-farm payroll gain in July. The data helped trigger a stock market sell-off that was accompanied by plunging bond yields.
Since then, stocks have recovered much of their losses, but the 10-year Treasury note yield remains well below 4%, and investors remain on edge in a highly volatile market atmosphere.
As the week began, when stocks were still plummeting, San Francisco Federal Reserve Bank President Mary Daly sounded reluctant to lend support to anti-recessionary rate cuts, pending further data confirming economic weakness.
“”We’ve now confirmed that the labor market is slowing, and it’s extremely important that we not let it slow so much that it tips into a downturn,” Daly said at a Monday event in Hawaii.
But Daly, a voting member of the FOMC this year, said, “it’s too early to tell” whether the labor market is “slowing to a sustainable pace which allows the economy to continue to grow” or whether “it’s getting to a point where there’s real weakness there.”
She said she does think the FOMC is approaching the time when it will need to lower rates “to preserve the balance” between the Fed’s mandates of “maximum employment” and “price stability.”
However, she added, “”I can’t tell you whether we will do a certain degree of cuts.”
Daly, who is usually thought of as falling near the middle of the “hawk-dove” policy spectrum, vowed she will be “watching very carefully to see if the next labor market report continues to suggest that kind of same number or same dynamic, but that could also reverse.”
She said employers in her vast 12th District have been giving her upbeat information about the labor market and the economy. “We don’t see firms laying off workers. We don’t see demand, slowing consumer demand, flowing incomes are still strong. Order books are still good. So, I see an economy that has momentum and we want to make sure we keep that.”
The same day, Chicago Federal Reserve President Austan Goolsbee, another FOMC voter, repeated past warnings against keeping monetary policy unduly restrictive for too long at the expense of economic activity and employment.
The reputedly more dovish Goolsbee warned, “You only want to be that restrictive if you think there’s fear of overheating.”
“These (labor market) data, to me, do not look like overheating, as you see jobs numbers come in weaker than expected but not looking yet like recession,” he continued in an appearance on CNBC.
“I do think you want to be forward-looking at where the economy is headed for making the decisions,” he added.
Speaking on a day when the Dow Jones industrial average fell more than 1,000 points, Goolsbee said, “If the market moves give us an indication over a long arc that we’re looking at a deceleration of growth, then we should react to that.”
And he said, “If the conditions collectively start coming in on the through line that there’s deterioration on any of those parts, we’re going to fix it.”
However, Goolsbee stopped well short of signaling a need for early or aggressive rate cuts. And then on Thursday, after the Labor Department reported lower jobless claims numbers than expected, he seemed to take an even more hesitant tone.
Goolsbee reiterated his belief that the Fed should not let real interest rates become overly restrictive by holding the nominal funds rate steady for too long as inflation moderates. But he stressed that the FOMC should not be swayed by market movements, much less political timetables.
“The Fed’s out of the election business,” he said. “The Fed is in the economic business.”
“We’re not in the business of responding to the stock market,” Goolsbee told Fox News. “We’re in the business of maximizing employment and stabilizing prices.”
Also Thursday, two of the more hawkish Fed presidents strongly suggested they are still not eager to cut rates while inflation remains above the Fed’s 2% target.
Richmond Fed President Thomas Barkin sounded even less anxious to ease policy than Daly and Goolsbee.
“It’s hard to make the case that something has just happened that is monumental on the equity side,” he told a National Association for Business Economics webinar.
Barkin acknowledged a moderation of inflation, but also suggested that the economy is not as weak as the July employment report seemed to imply. He said employers in his 5th district have slowed their hiring but are not firing workers.
Taking a balanced, patient approach, Barkin, said, “all the elements of inflation seem to be settling down (and) I’m relatively hopeful based on the conversations I’m having that that’s going to continue.”
At the same time, he said, “I think you’ve got some time in a healthy economy to figure out whether this is an economy that’s gently moving into a normalizing state that will allow you to, in a steady deliberate way, normalize rates or … is this one where you really do have to lean into it.”
A third official to speak Thursday was non-voting Kansas City Fed President Jeff Schmid, who was the most resistant to cutting rates until further progress has been made against inflation.
Despite what he called “sharp movements in financial markets,” he emphasized that “all discussions of monetary policy must be rooted in Congress’s instruction that the Fed pursue a dual mandate of price stability and full employment.”
“Of course, financial conditions can both reveal important information on the trajectory of the economy and can also spillover to impact the real economy,” Schmid continued in remarks in Colorado. “However, the Fed has to remain focused on achieving its dual mandate, and in recent years we have had our work cut out for us.”
Schmid observed that “inflation has come down, falling from over 7% at its peak to
2½% by the middle of this year, much closer to our 2% objective,” but he made clear he needs to see more disinflation to support rate cuts.
“We are close, but we are still not quite there.…,” he said. “(I)f inflation continues to come in low, my confidence will grow that we are on track to meet the price stability part of our mandate, and it will be appropriate to adjust the stance of policy.”
Somewhat countering the assertions of Powell and other officials that monetary policy is “restrictive,” Schmid said, “while the current stance of policy is restrictive, it is not that restrictive…..” as shown by “the resilience of the economy and growth over the past two years even as interest rates climbed sharply higher.”
“Of course, last week’s employment report for July led many to question this resilience,” he went on. “But it is important to note that many other indicators point to continued strength.”
In his 10th District, Schmid said, “I continue to hear a general tone of optimism and
resilience.” And he added that the 4.3% reported unemployment rate belies continued strength in the labor market. “Across many indicators, there has been a noticeable cooling of the labor market from the historically tight conditions of 2023 and 2022. But overall, the labor market still appears healthy.”
He pointed to the Kansas City Fed’s own Labor Market Conditions Indicator (LMCI), which shows that “looking much broader than the unemployment rate alone, the labor market still appears to be quite strong….”
Besides, he said, echoing a point made by Powell many times in the past, the labor market needs to soften to get inflation back to target. “At this point, the cooling of the labor market can be viewed as a necessary condition for the easing of inflation that we have experienced. Imbalances in the labor market were a key factor keeping inflation high, and a looser market was needed to bring inflation down.”
Schmid conceded “this story could change if conditions were to weaken considerably more.”
For now, he said he “would not want to assume any particular path or endpoint for the policy rate.”
“This is to say the data and the performance of the economy should guide policy rather than a presumption that we must return to some pre-pandemic perception of normal.,” he continued. “I will be carefully watching the data and gathering information on growth, jobs, and inflation as I judge the appropriate path for policy.”