Fed official hints more rate cuts possible
Days after the Federal Reserve lowered borrowing costs for a second time since July, a top Fed official signaled Friday that further interest rate cuts could come before the end of the year.
Vice Chairman Richard Clarida, asked in an interview on CNBC whether markets had seen the final reduction in borrowing costs for 2019, chose to emphasize that the Fed’s September economic projections, released Wednesday, have seven officials expecting a third rate cut before the end of the year.
“That’s not a commitment; we didn’t vote on it,” he said.
The Fed wants to keep its options open, and Clarida, the first member of the Fed’s board of governors to speak since Chair Jerome Powell’s post-meeting news conference Wednesday, made that point clear, saying earlier in the interview that “going into October and beyond, we’ll go one meeting at a time.”
He emphasized that the Fed was contending with threats to the economic outlook arising from slowing global growth, President Donald Trump’s trade war and stubbornly weak inflation. But he also highlighted that the labor market and consumer spending were strong.
Against that polarized backdrop, the Fed has become increasingly divided over how to carry out monetary policy. Three officials disagreed with the decision to cut interest rates by a quarter point this week, the most dissenters since 2016. Two thought the committee should have held steady, while James Bullard, president of Federal Reserve Bank of St. Louis, said it should have cut rates by more.
The Fed is dealing with a stark contrast: Real-time data look strong, but the economic outlook remains fraught. That is prompting the central bank to make its decisions meeting by meeting, as both Clarida and Powell have said.
But Clarida’s decision to emphasize the set of officials who expect an additional cut, paired with Powell’s repeated emphasis during his news conference on how much the board’s thinking has evolved since last year, when it was raising rates, seems to suggest that the momentum is still headed toward easier monetary policy.
“The main takeaway,” Powell said, “is that this is a committee that has shifted its policy stance repeatedly, consistently through the course of the year, to support economic activity as it has felt that it’s appropriate.”
What qualifies as “appropriate” is increasingly contested. Bullard, who wanted a more aggressive cut this month, released a statement Friday explaining his rationale.
“There are signs that U.S. economic growth is expected to slow in the near horizon,” he wrote. “Trade policy uncertainty remains elevated, U.S. manufacturing already appears in recession and many estimates of recession probabilities have risen from low to moderate levels.”
His colleagues Esther George, from the Federal Reserve Bank of Kansas City, and Eric Rosengren, from the Federal Reserve Bank of Boston, also voted against the September move but in favor of leaving rates unchanged. They had dissented with the July rate cut, as well.
“Additional monetary stimulus is not needed for an economy where labor markets are already tight,” Rosengren said in a statement about his rationale. He added that cutting rates “risks further inflating the prices of risky assets and encouraging households and firms to take on too much leverage.”
He said that “risks clearly exist related to trade and geopolitical concerns” but that “lowering rates to address uncertainty is not costless.”
Yet Clarida said the committee as a whole did not see financial risks as elevated. And he used his interview to push back on one common rationale for holding off on further cuts: the idea that it makes sense to save ammunition for the future, given that the Fed’s policy rate is already low by historical standards.
Instead, he said, “it’s important to act when you can, responsibly and preemptively, to try to stay away from that bad situation.”
While Trump has been pushing the Fed to lower rates to zero or below, arguing that doing so would make the U.S. more competitive with economies in Europe and Asia, Clarida suggested that negative rates were not on the table. Both he and Powell have noted that negative rates were considered and rejected during the Great Recession.
And Clarida added that the U.S. economy did not need to go as far as other countries, saying their negative rates “are a symptom of very, very slow growth.” While the outlook shows cracks, the U.S. economy remains strong.
“The U.S. economy is a resilient economy; we have really been the star pupil in the class of the global economy,” he said.