With little prospect for a rate move this week, the main point of interest in this Wednesday afternoon’s outcome to the Federal Open Market Committee meeting is whether the Committee will signal any sort of lean towards a near term rate cut.
*** As we wrote last week (SGH 4/22/19, “Fed: A Pre-emptive Rate Cut Recalibration”), we believe there is a Committee minority who will be making the case for a pre-emptive rate cut as insurance against a downward drift in inflation and inflation expectations, even if growth is showing no evidence of recession or stall speed. That said, the majority Committee consensus going into this week is to maintain the “patient pause” on rates until there is clear evidence in less noisy data on the merits of a next rate move. ***
*** While we doubt Chairman Powell will close the door on a near rate cut, even if he pushes back on a White House official helpfully suggesting the “door is open,” we suspect it is probably a tad too early for a Committee rate cut consensus to come into clear view. Instead, an elevated emphasis on the downside risks in the persistence of muted inflation – “the challenge of our time” as Powell described it in March – may prove to be the most likely signaling that a near rate cut will at least be on the table through the next few FOMC meetings. ***
The opening descriptive paragraph on the economy will need to be spruced up a bit to reflect the better-looking economy and outlook, and we are assuming the patient language remains, though there is likely to be a pitch to adjust the guidance language to a more neutral phrasing.
The most important update to the statement the FOMC wordsmiths may consider is whether, and how, to tweak the inflation language to acknowledge a heightened concern over the muted inflation in the core measures and expectations. The path of least hassle is probably just to note some slippage in inflation despite the better-looking growth in the first paragraph.
But in terms of potential statement signaling we will be looking for, we wonder whether the references to “global economic and financial developments” could be adjusted or even stripped out of the patience sentence – both are less threatening than they looked in March – to leave the rates guidance more directly focused on the muted inflation concerns; that may prove to be too clever by half, or reading too much into the statement phrasing, but it would be a nuanced way to set the stage for a rate “recalibration” in a later meeting, albeit still leaving room to back away if the data should unexpectedly surprise to the upside in the coming weeks.
In the Chairman’s post-meeting press conference, we would be surprised if Powell flat out confirmed the FOMC is indeed weighing a near rate cut, or for that matter, to dismiss it out of hand. If for any other reason, we still find it hard to believe a consensus to move away from the current patience on rates “in either direction” could be crafted so quickly this week, or justified by the data quite yet.
Instead, we think it more likely than not that Chairman Powell may stick to the safety of his March meeting phrasing that the Fed will be watching the data and that the next rate could be “in either direction.” Reporters will, of course, press him to lay out the conditions under which the Fed would consider a rate cut, or what the minimal threshold to a cut would be.
We suspect, on balance, the Chairman will stick to the non-committal vagueness he offered in response the same question in March. But he will certainly be given plenty of opportunity in the presser to lay out a signal-laden lean towards a potential rate cut if he confirms the FOMC will be sensitive to a low inflation “threshold” in the coming months. That, at a minimum, would make the run-up to the June meeting much more interesting.
An IOER Technical Cut
One last point we wanted to note is whether, with continued strain in the money markets, the FOMC will include a cut in the Interest on Excess Reserves on Wednesday. While the technical issue involved is a little out of our wheelhouse, to be frank, we think two considerations could limit a response this week.
The first is that the upward drift in the effective fed funds rate above the IOER may not be sustained, so it may be worth it to the FOMC to let things play out a bit longer to better understand the linkages in short rates.
More to the point, our sense of the FOMC’s sensitivities to messaging misfires these days would point to a more cautious decision, in which the Committee agrees to give the Open Market Desk a green light to execute the technical cut in the IOER “if needed” at an opportune moment between meetings. That might keep a technical cut away from the high media glare of a FOMC meeting when so much of the focus is on policy rate signaling.