One and Done? Will the Fed Make a Small Cut, Then Quit?

Political pressure is high on Chairman Jerome Powell to do something in July. The question is how much.

Almost everyone, even the Federal Reserve, thinks it is going to lower short-term interest rates this month. But how much will that be? Maybe just a quarter point, then it will be done for the year.

Federal Reserve Chairman Jerome Powell, who earlier called a halt to the ongoing campaign to ramp up the benchmark federal funds rate by a quarter percentage point (25 basis points) every three months or so, has been sounding dovish notes.

The Fed’s policymaking panel, the Federal Open Market Committee (FOMC) meets July 30-31, and expectations in the futures market are high (72% probability) for a cut of a quarter point. By year-end, wagers at the CME Group are for two more quarter-point reductions.

“Many FOMC participants judge that the case for somewhat more accommodative policy has strengthened,” Powell told the Council on Foreign Relations in New York last week.

Nonetheless, it doesn’t follow that Powell wants the Fed to lower rates as significantly as the futures market foresees. He has made clear that the central bank will go its own way, depending on the economic data, which remains encouraging, although slowing down.

The Fed likely will lower rates by only a quarter-point this year, in the view of Brad McMillan, chief investment officer at Commonwealth Financial Network. He expects the top rate of the federal funds rate, now 2.5%, to be lowered to 2.25%. “Overall, the real monetary policy story of the balance of 2019 is likely to be that there is no story,” he wrote in a research note.

James Bullard, the St. Louis Fed chief, said in an interview on Bloomberg TV that a quarter-point dip would be sufficient. “I think 50 basis points would be overdone,’’ he said. “I don’t think the situation really calls for that. But I would be willing to go 25.’’

President Donald Trump has loudly been demanding that the Fed lower rates drastically, saying the central bank “blew it” by not doing this in its last meeting and is acting like “a stubborn child.” Of course, the president wants to see the economy get as much juice as possible so it looks good when he seeks reelection next year.

Interestingly, Powell has pushed back, emphasizing the independence of the Fed. At the same New York appearance, Powell emphasized that “the Fed is insulated from short-term political pressures.” 

Commonwealth’s McMillan and many others point out that economic growth is decelerating in the US and around the world. “Economic growth is slowing, inflation has moderated, and the Fed’s plans are consistent with those developments,” he indicated. “So, interest rate policy becomes driven by stability rather than change.”

At the same time, the economy remains in pretty good shape. Unemployment, at 3.6%, is at its lowest point in 50 years, and is expected to stay there when the June jobs report comes out on Friday.

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