By Steven K. Beckner
ST. LOUIS (MaceNews) – As Federal Reserve policy-makers prepare to consider further interest rate reductions in two weeks, supporters of the late July rate cut have become more unequivocal about the need for additional easing, and there are signs that erstwhile opponents are becoming more open to it.
With corporate purchasing managers showing outright contraction of manufacturing as trade contention and slowing global growth roil financial markets, Fed officials are clearly reassessing the needs of the U.S. economy.
Less than a month ago, St. Louis Federal Reserve Bank President James Bullard was taking a wait-and-see attitude, saying the Fed’s rate-setting Federal Open Market Committee had “taken out some insurance” against trade risks by cutting the federal funds rate 25 basis points and that it would have to “see if we bought enough
insurance.”
Now, Bullard is being much more emphatic about the need for further rate action to address risks to the economic outlook.
At 2 to 2.25%, the Fed has the funds rate target range “too high” and should make an “aggressive” cut of 50 basis points, he told Reuters ahead of a “Fed Listens” conference at his Bank.
Boston Fed President Eric Rosengren, one of two Federal Reserve Bank chiefs who voted against the July 31 rate cut, was still holding back from cutting rates again Tuesday, but indicated he is open to doing so.
Rosengren downplayed the significance of the inverted yield curve and said “the gradual slowing of GDP growth that we are seeing is really not surprising — and is not necessarily a signal of a weakening economy headed for a recession, but instead a natural pattern.”
However, he said, “at times like this, it is important to carefully study incoming economic data. If the risks become pronounced and threaten the U.S. outlook, then further monetary easing may be appropriate.”
New York Fed President (and FOMC vice chairmnan) John williams was more ambiguous than Bullard about the need for further easing Wednesday morning, repeatedly citing the need for more data. But he seemed much readier to move than Rosengren.
While the economy is “in a good place,” Williams cited both internal and external “risk and uncertainty,” in remarks prepared for delivery to a Euromoney conference.
“If we look beyond the headline GDP figure, which remains good, there are more mixed signals coming from different sectors,” he said. “Robust consumer spending is balanced by signs of slowing business investment. We’ve also seen a decline in exports and weakening manufacturing data, reflecting slowing global growth and uncertainty
related to trade and geopolitical risks.”
Later, Williams cautioned reporters against assuming that strong consumer spending could sustain expansion. “The consumer is now carrying all of the weight, or much of the weight, for growth going forward,” he said, adding that he does not expect it to continue as robust as it’s been and noting that, in any case, consumer spending is more of a lagging indicator.
Last Friday, the Commerce Department reported that personal spending had risen 0.6% in July, after rising 0.3% in June, but with income growing just 0.1%, the spending was financed out of savings. And as TS Lombard economist Steve Blitz told me, the sustainability of “robust” consumer spending is in doubt:
“The momentum we’re seeing in consumer spending looks to me like a false flag, because underlying it is a slowing pace of employment and income growth,” Blitz said. “The momentum we’re seeing reflects a combination of delayed purchases from earlier in the year and perhaps now accelerated purchases in anticipation of tariffs making goods more expensive during the holiday season.”
Internationally, Williams warned “slowing global growth and geopolitical uncertainty pose particular challenges …. Slower global growth reduces demand for our exports and puts a dampener on both U.S. inflation and growth prospects.”
“And these aren’t just projections for the future — we’re seeing manifestations of slowing growth around the world now,” he continued. “Germany, the UK, and China are all experiencing slowdowns, and the euro area is of particular concern. In response, the European Central Bank and several other central banks have either adjusted, or indicated they will adjust their monetary policy stance to support their economies….”
Williams added that “concerns around trade policy with China are adding to an uncertain picture. My contacts in the business community have said this is making them more cautious about investment. The effects of this angst are already showing up in the investment numbers.”
The FOMC must pursue “a data-dependent approach that takes into account the risks and uncertainty that are weighing on the economy,” he said.
As one of Chairman Jerome Powell’s top lieutenants, Williams said he is “carefully monitoring this nuanced picture and remain vigilant to act as appropriate to support continuing growth, a strong labor market, and a sustained return to 2 percent inflation….I’m keeping a keen eye on all the data, both domestic and global, and the implications for our economy. With an uncertain outlook, vigilance and flexibility are essential for achieving our dual mandate goals of maximum employment and price stability.”
Chicago Fed President Charles Evans, who voted for the July rate cut, seemed to go out of his way Wednesday to warn of the adverse implications of trade policy in introductory remarks to an auto industry conference at the Chicago Fed’s Detroit branch.
“When businesses are weighing whether or not to make substantial investments, uncertainty tends to slow down such decisions,” he said. “The auto industry has been especially challenged by the uncertainty posed by actual and proposed changes in trade policy, as its production operations in the United States, Canada, and Mexico are closely linked across the three countries.”
Aside from the downside risks posed by trade tensions and global slowing, Fed officials seem increasingly focused on persistently below-target inflation and the threat that could pose to the central bank’s ability to run countercyclical monetary policy.
Fed Governor Michelle Bowman, who participated in the St. Louis Fed conference, observed that “for many years, inflation has run modestly below our 2 percent objective” and asked whether the FOMC “should consider strategies that aim to have inflation exceed our target for a time, to make up for the earlier period of time when it fell short.”
Williams called long-running, below-target inflation “the problem of this era” and “a key area of my attention.”
The ostensible implication is that, even if consumer spending continues to grow at or above trend, global downward pressures on inflation and long-term interest rates could provide a ready rationale for further easing.
As six advisory councils reported to the St. Louis Fed conference, Bullard and Bowman got an earful about the baleful effects of tariffs. Speaking for the Agribusiness Council, Tania Seger, Vice President of Finance, North American Commercial Operations, Bayer Crop Science, said they are “creating havoc” for agriculture, leading to bankruptcies and
forcing consolidation.
Seger also told Bullard and Bowman members of her Council “want clear, consise, credible communications” from the Fed — “even predictable if you can do that. We want confidence that the Fed knows what it’s doing.”
A number of the Councils stressed the need for an independent, “nonpartisan” Fed.
Bullard, who posed questions to council members, expressed surprise that the real estate industry was not doing better given that “long-term yields have come down a lot.” Noting the 10-year Treasury note yield having fallen from 3.25% to below 1.5% in the past year, he said, “that’s a pretty dramatic change. I would think that would be a boost to
this industry.”
Speaking on behalf of the Community Depository Institutions’ Council, Craig Esrael told Bullard and Bowman that the Council members agreed “the federal funds rate target may be slightly high.” He said their preferences were “between 25 and 50 basis points but certainly leaning toward a decrease in rates.”