Fed Officials Signal Quarter-Point Rate Cut Likely at July Meeting
July 19 2019 - 2:49PM
Dow Jones News
By Nick Timiraos
Federal Reserve officials signaled they are ready to cut
interest rates by a quarter-percentage point at their coming
meeting, while indicating the potential for additional reductions
because they are worried about a slowdown in global growth, an
increase in trade-policy uncertainty and a pullback in
inflation.
Officials aren't prepared for bolder action by making a
half-point cut, as analysts and traders have speculated in recent
days, according to the officials' recent public statements and
interviews.
The larger move appears unlikely for now because officials have
said recent economic developments haven't signaled an imminent
downturn.
Fed Chairman Jerome Powell set the stage for the cut last week
during congressional testimony, when he signaled concern about
global growth and the risk of a more prolonged shortfall in
inflation from the Fed's 2% target. Those developments strengthened
the case for a somewhat easier policy stance, he said.
The upshot is that -- barring unexpected economic developments
between now and the July 30-31 meeting -- the bigger debate will
center on how to signal their plans and outlook beyond July.
Market expectations of a half-point Fed cut swelled Thursday
afternoon after New York Fed President John Williams delivered a
speech expounding upon 20 years of theory and practice that
indicates more aggressive and pre-emptive action is warranted when
the economy is weakening at a time that interest rates are already
low.
Mr. Williams's words carry great weight in markets, in part,
because he is vice chairman of the rate-setting Federal Open Market
Committee. After markets began anticipating the larger rate cut,
the New York Fed issued a rare clarification that the speech hadn't
been intended to deliver a specific signal about near-term policy
actions.
"This was an academic speech on 20 years of research. It was not
about potential policy actions at the upcoming FOMC meeting," said
a New York Fed spokesman on Thursday evening in response to
questions from reporters.
Mr. Williams, a leading academic thinker, highlighted points he
has made publicly before. But the context of his remarks -- he was
speaking near the start of the Fed's customary premeeting quiet
period, which begins Saturday -- fueled an unintended market
reaction.
"We have not seen anything like this before and honestly, we are
not sure what they were thinking," said Neil Dutta, head of
economics at Renaissance Macro Research LLC in a client note on
Friday morning. "Of course the market would latch on to a speech
like this -- given focus and timing -- right before the July
confab."
President Trump, who has been regularly calling for multiple
rate cuts, said on Friday in a pair of tweets that he preferred Mr.
Williams's "first statement much better than his second." He
repeated his call for the Fed to cut rates aggressively: "Don't
blow it!"
Fed officials will have other developments to consider over the
coming 10 days, including the European Central Bank's policy
decision next Thursday and reports on U.S. second-quarter economic
growth and inflation.
Some officials who support lower rates have said they don't
think the Fed needs to make a big move right now. St. Louis Fed
President James Bullard -- who dissented from the June decision to
keep rates steady because he favored a rate cut -- said in an
interview he would "listen to arguments" for a half-point cut but
added, "Sitting here today, I just don't think the situation really
calls for that aggressive of a move."
Dallas Fed President Robert Kaplan said in an interview Tuesday
he could support a "tactical" rate cut because of recent declines
in long-term bond yields, but that any such move should be "modest,
restrained [and] limited." He said he was worried about the
potential to stoke asset-price bubbles by providing unnecessary
stimulus.
Fed Vice Chairman Richard Clarida has repeatedly and approvingly
cited examples from 1995 and 1998 when the Fed took out "insurance
policies" by pre-emptively lowering interest rates when the economy
still appeared healthy. In both of those cases, Fed officials
initiated what would become a series of three rate cuts, in
quarter-point intervals, over a few months.
If Fed officials draw from that playbook now, they would
disappoint investors who have bet on a larger half-point cut,
officials would nevertheless hold open the possibility of
additional cuts.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
July 19, 2019 14:34 ET (18:34 GMT)
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