NEW YORK: Barely a week after the US
called a halt to interest rate hikes, policymakers are now battling a view growing in financial markets, and embraced by the
administration, that the Fed will need to cut rates before long.
Larry Kudlow, President Donald Trump’s top economic advisor, said Friday on CNBC that while there is “no emergency,” the Fed should cut rates to protect the US economy from slowing down.
But no fewer than five Fed officials in the past 24 hours have touted the underlying strength of the American economy and argued the recent spate of weak data on business activity is more likely to prove fleeting than lasting.
Even the Fed’s two most dovish policymakers – the presidents of the St. Louis and Minneapolis regional banks – say they are not ready to agitate for the central bank to start reversing three years of rate increases.
On Friday one of the bank’s centrists, Randal Quarles, the Fed Board of Governor’s Vice Chair for Supervision, offered an optimistic view of the US economy and said more rate increases may be needed if recent positive trends in productivity and investment continue.
Quarles is the latest in a series of policymakers insisting the Fed has an option to raise rates even as markets increasingly regard such a move as unlikely. The latest monthly jobs report showed a sharp slowdown in hiring, and recent data shows factory activity, business and consumer confidence and inflation have all weakened.
Indeed, prices on futures contracts tied to the Fed’s policy rate on Friday reflected bets the central bank will need to reduce interest rates by September.
Speaking in New York, Quarles said he is inclined to dismiss the recent data as “a bit odd” and “inconsistent” with underlying strength, wage gains that should be boosting households, and a rise in productivity he feels could be “persistent” and lead to stronger growth down the road.
Doves and hawks together
But it wasn’t just Quarles, who has long tended to be on the more hawkish end of the Fed’s policy spectrum.
Even Minneapolis Federal Reserve Bank President Neel Kashkari, one of the biggest opponents of rate hikes at the central bank, told Reuters on Friday that it is “premature” to think about a cutting rates in response to economic data and market indicators.
Also on Friday, Dallas Federal Reserve President Robert Kaplan said bond markets are pointing to skepticism about future economic growth. But some economic data in the first quarter was distorted by a partial US government shutdown and consumers are in good shape, he said.
Perhaps most telling are remarks by the influential chief of the New York Fed, John Williams, who on Thursday said the US economy is in “a very good place” and described the likelihood of a recession in 2019 or 2020 as “not elevated.”
“I’m not as worried about a recession as some of my colleagues in the private sector,” Williams said. “I still see the probability of a recession this year or next year as being not elevated relative to any year.”
St. Louis Fed President James Bullard late Thursday also said it was premature to discuss any rate cut and felt the economy would likely rebound.
The Fed last week kept its target range for short-term rates at 2.25 per cent to 2.5 per cent, and projections showed most policymakers do not see any rate hikes this year, a downgrade from December when the median forecast was for rates to rise to 2.9 per cent.
That downgrade was followed days later by a market phenomenon known as a yield curve inversion, where short-term rates exceed long-term rates, a pattern in the bond market that historically precedes a recession.
Policymakers have been keen to avoid the perception becoming reality, which may explain some of their pushback in recent days.
With the unemployment rate at 3.8 per cent and the economy still growing faster than potential even as it slows, they also are reluctant to abandon the idea that inflation and wages will eventually perk up.
“It’s just taking a longer time than it typically does,” San Francisco Fed President Mary Daly said earlier this week.