The Federal Reserve is settling on a cautious approach to monetary easing, with a 25 basis-point cut in interest rates likely at its next policy meeting, as Jay Powell, the chairman, seeks to support the US economy without committing to much deeper stimulus.
In recent weeks, public appearances by Fed officials have revealed a broad desire to move towards looser monetary policy to shield the US economy from risks to the outlook arising from trade tensions, weakness in global growth and persistent low inflation.
But while Jay Powell appears to be steering the Fed towards a one notch interest rate cut at the end of its next two-day gathering of top officials on July 31, there is far less of a consensus at the US central bank in favour of a more forceful 50 basis point rate reduction at this stage, according to a string of comments by Fed officials last week, as well as market expectations.
James Bullard, the president of the St Louis Fed and a voting member of the policy-setting Federal Open Market Committee who is known for his dovish views, last week said he believed a 25 basis point reduction would be sufficient for now. Another voting member of the FOMC, Charles Evans, the president of the Chicago Fed, spoke openly of possible benefits from a 50 basis point reduction in rates soon, but added that others may feel differently.
On the other side of the argument, two voting members, Esther George, the president of the Kansas City Fed, and Eric Rosengren, the president of the Boston Fed, suggested there might not be a case for any immediate rate cuts and policymakers might want to wait for harder evidence of a downturn.
One of the clearest signs that the middle ground among Fed officials is in favour of approving a more limited stimulus in July came after the New York Fed clarified that an ultra dovish speech from John Williams, its president, should not be seen as a guide to future policy. Mr Williams had said that it “pays to act quickly to lower rates at the first signs of economic distress”, sending market expectations of a 50 basis point cut soaring, but the New York Fed said he was just summarising his research going back 20 years. “We suspect the FOMC was uncomfortable with the market moving toward a 50bp cut and wanted to push the market back to a 25bp baseline,” Michelle Meyer, head of US economics at BoAML, wrote in a note.
Even though the Fed is moving towards a more modest rate cut in the short term, it is still expected to signal its willingness to lower rates further later this year, by at least one more notch, to reinforce its support for the expansion.
But the goal of Fed policy at this point is still for the rate cuts to be “insurance” against a downturn, so it can avoid a more complicated and deeper easing cycle that would accompany a major slump in the economy, economists say. It will have been encouraging to Fed officials that some economic indicators have performed well since they began signalling a future rate cut was looming in June, beginning with a speech by Mr Powell at the Chicago Fed. The release of second quarter GDP data on Friday is expected to show US growth slowed to 1.6 per cent, from above 3 per cent in the first quarter, according to the Atlanta Fed, but the figures are unlikely to sway Fed officials significantly one way or the other.
Should the Fed move to cut interest rates by just 25 basis points, the Fed could draw some ire from Donald Trump. The US president has been calling for monetary easing, and while he is on the verge of securing it, he has been campaigning for more. Mr Trump has already considered firing Mr Powell from the top Fed job, in a challenge to the central bank’s independence, but Mr Powell has said he intends to serve out his four-year term regardless of the presidential pressure.