Fed's Rate Cut Chatter Grows as Kashkari Backs Half-Point Drop
(Bloomberg) -- The drumbeat for a Federal Reserve interest rate cut is getting louder, with one policy maker calling for a 50 basis point reduction.
Minneapolis Fed President Neel Kashkari said Friday that he’d advocated for such a move at the central bank’s June 18-19 meeting, where officials ended leaving rates unchanged.
Other policy makers speaking on Friday didn’t go as far as Kashkari, considered one of the Fed’s more dovish officials. But their comments reinforced expectations that the Fed is on course to reduce rates, perhaps as soon as its July 30-31 gathering.
President Donald Trump, who’s sharply criticized Fed Chairman Jerome Powell for keeping credit too tight, said Thursday that he expects the central bank to lower rates. “Can’t win it all. Eventually he’ll do what’s right,” the president said of Powell.
Powell deputy Richard Clarida said on Friday that the argument for easier policy has strengthened recently as the economic outlook has turned more uncertain.
“The case for providing accommodation has increased,” Fed Vice Chair Clarida said in a Bloomberg Television interview. “There’s been a marking down in global growth prospects. There’s been uncertainty about international trade.”
Trump is slated to meet Chinese President Xi Jinping at the June 28-29 summit of Group of 20 nations in Osaka, Japan, to try to head off a further escalation in the trade war between the world’s two biggest economies. The president also has threatened to impose tariffs on auto imports from Japan and the European Union.
Adding to the uncertainty are heightened tensions in the Middle East after Iran shot down a U.S. drone and Trump tweeted he came within minutes of launching a retaliatory attack. On Saturday Trump said that military action is “always on the table.”
Fed Governor Lael Brainard also sounds open to a rate cut, even as she describes the U.S. economic outlook as solid.
Recent weeks “have seen important downside risks,” Brainard said Friday at a Fed event in Cincinnati, adding that the central bank must take those into account when setting policy.
A gauge of U.S. factory activity fell in June to the lowest since late 2009 while a separate measure of the service sector edged down to a three-year low, according to surveys of business purchasing managers by IHS Markit.
The data suggest that “economic activity is rapidly downshifting,” said Joseph LaVorgna, chief economist for the Americas at investment bank and asset manager Natixis.
What Our Economists Say
“The messaging from the June FOMC meeting showed policy makers demonstrating heightened sensitivity to both market and economic signals...Bloomberg Economics now projects the Fed to execute 50 bps of rate cuts by year-end in an attempt to reduce inversion pressures on the yield curve, and to avoid orchestrating policy in a manner contrary to the increasing dovishness among other major foreign central banks.-- U.S. economists Carl Riccadonna and Yelena ShulyatyevaClick here to read more.
The Federal Open Market Committee’s vote on Wednesday to leave rates unchanged -- in a 2.25% to 2.5% range -- wasn’t unanimous. St. Louis Fed President James Bullard sought a quarter-point rate cut.
His vote marked the first dissent of Powell’s 16-month tenure as chairman. (Kashkari isn’t a voting member of the FOMC this year, although he will be in 2020).
In a blog posting on Friday explaining his dissent, Bullard said he favored a cut to guard against downside risks of too-low inflation and weaker growth.
“Even if a sharper-than-expected slowdown does not materialize, a rate cut would help promote a more rapid return of inflation and inflation expectations to target,” he said.
The Fed has failed to convincingly hit its 2% inflation objective since 2012. What’s more, inflation expectations, particularly in financial markets, have fallen recently and Fed officials themselves have marked down their forecast of price rises this year, to 1.5%, from 1.8% in March.
Kashkari zeroed in on tepid inflation and inflation expectations in his call for easier monetary policy at this month’s FOMC meeting.
“I advocated for a 50-basis-point rate cut to 1.75% to 2% and a commitment not to raise rates again until core inflation reaches our 2% target on a sustained basis,” Kashkari wrote in an essay. “I believe an aggressive policy action such as this is required to re-anchor inflation expectations at our target.”
Ellen Zentner, chief U.S. economist at Morgan Stanley, said that rate cuts are the best way for the Fed to boost inflation expectations, stabilize financial markets, counter global growth and trade risks, and support the economy.
“There’s one answer right now for their ills, and that’s for them to drop rates,’’ Zentner, who expects a half-point cut next month, said in a Bloomberg Television interview Friday. “It’s the right prescription to start aggressively.’’
--With assistance from Christopher Condon, Matthew Boesler and Steve Matthews.
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