By Nick Timiraos
Federal Reserve officials meet Tuesday recognizing they may need
to cut interest rates should the economic outlook darken. The
question is whether that moment has arrived or if they need more
information before deciding.
Recent economic data paint a mixed picture, with consumer
spending still solid, but with manufacturing, inflation and global
growth having slowed even before the recent escalation in trade
tensions.
Policy makers are considering whether their short-term benchmark
rate, which has been in a range of 2.25% to 2.5% this year, is
curbing economic growth more than they expected, especially if
uncertainty over U.S. trade policy chills business investment and
weakens corporate profits.
Broadly speaking, the case for cutting rates is stronger than
when officials met April 30-May 1. Back then, they were more
optimistic about the economy and on their make-no-moves policy
stance, largely because a U.S.-China trade deal appeared in
sight.
Since then, President Trump increased tariffs on China after
negotiations stalled and threatened to impose tariffs on Mexico. He
later suspended the threat, subject to a review of Mexico's efforts
to curb migration, sowing new uncertainty about trade policy.
The episodes rattled business confidence and led bond investors
to begin predicting Fed rate cuts beginning at its July 30-31
meeting. The Mexico tariff threat also illustrated the difficulty
central bank officials face in forecasting economic outcomes given
Mr. Trump's mercurial trade policies.
The choices at this two-day meeting are between cutting rates
now if they see the economic outlook worsening or holding off and
cutting next month if the picture grows darker.
Some Fed officials have said they would prefer to wait until the
July 30-31 meeting to see if data and political events provide a
stronger signal about whether the economy needs more stimulus. They
have signaled reluctance to respond to trade uncertainty before
next week's G-20 summit in Japan, where the U.S. and China could
put trade talks back on track.
"I want to take a little bit more time...because some of these
recent events could be reversed," said Dallas Fed President Robert
Kaplan in a June 4 interview, before Mr. Trump decided to suspend
the tariffs on Mexico.
On the other hand, officials are mindful of research that finds
when their policy rate is historically low, leaving less room to
cut it in a downturn, they should move more quickly to respond to
any economic shakiness.
If officials think the risks of more trade disputes are unlikely
to diminish or that the economic data are unlikely to improve
before their July meeting, they could argue there is less benefit
and more risk to waiting to cut rates.
Low inflation readings coupled with rising risks to growth from
trade frictions may warrant lower rates, said St. Louis Fed
President James Bullard in comments to reporters June 3.
"The previous narrative was that deals were just around the
corner...and now it looks like trade deals are not around the
corner," he said. "It's the global trade regime uncertainty factor
that is adding impetus to the case for a rate cut."
Fed officials are also wrestling with questions regarding how
their decision last year to raise their benchmark rate above the
inflation rate rippled through the economy.
Inflation has slowed this year, rather than holding at the Fed's
2% target as officials expected late last year. Excluding volatile
food and energy categories, prices rose 1.6% in April from a year
earlier, according to the Fed's preferred gauge. Global commodity
price declines indicate weaker growth abroad could continue to hold
down prices.
Fed officials pay especially close attention to businesses' and
households' expectations of future inflation because they believe
these expectations strongly influence actual inflation. The
University of Michigan's June consumer survey showed expectations
of annual inflation over the next five to 10 years fell to 2.2%, an
all-time low for the 40-year series.
While job growth this year has slowed to levels in line with
what Fed officials have expected, some data hint at more potential
weakness if economic activity decelerates further. Year-over-year
growth in total weekly hours worked for nonsupervisory workers
slowed to 1.1% in May, from 2.8% in January, and manufacturing
overtime hours are 6.7% below the year-earlier level, according to
Deutsche Bank.
Other major central banks are lowering rates or considering cuts
to combat weaker global growth. European Central Bank President
Mario Draghi opened the door to rate cuts earlier this month, and
several Asian central banks have eased policy this year. Australia
cut its policy rate this month for the first time in three
years.
Fed officials could cite signs of cooling global momentum if
they cut rates this week.
If they hold off, markets will parse Chairman Jerome Powell's
comments in his postmeeting press conference Wednesday to see if
they bolster or push back against market expectations of a July
rate cut. "A lot will depend on the tone of the announcement and
the tone of the press conference," said Donald Kohn, a former Fed
vice chairman.
At a minimum, officials appear likely to replace language in
their policy statement that since January has said they would be
patient in making further rate changes. The language signaled a
stance with no bias toward moving rates up or down. They are also
likely to acknowledge that risks to economic growth have risen.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
June 18, 2019 05:44 ET (09:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.