The Federal Open Market Committee (FOMC) voted to keep rates unchanged at their meeting today. One member, Jim Bullard of the St. Louis Federal Reserve dissented. He had supported a rate cut this time, and was not alone. Dissenting votes are rarely made in a void. They usually represent at least one other member in the room who cannot vote. Several members of the FOMC have shown a softening toward rate cuts in recent weeks. There are others who would rather keep the powder dry and not appear as though the institution is bending to political pressures. There are some within the Fed who wanted to wait out the G20 meetings to see if the president levies additional tariffs on China, but their mood about the economy has clearly darkened.
The statement that accompanied the Fed decision to stand pat included less bullish language on the economy, which has disappointed since the last meeting in May. The word “patient” was removed from the statement, which suggests a willingness to cut rates in July. The statement also included new language, which Fed Chairman Jay Powell has used arguing that the FOMC “will act as appropriate to sustain the expansion.” This, coupled with language about “closely monitoring” the economic situation, further underscores the Fed’s willingness to cut soon.
The biggest surprise was the “dot plot,” which showed no change in the trajectory for interest rates in 2019. Powell has gone out of his way to de-emphasize the importance of the “dot plot” for market participants. It is not a representation of a consensus view on the FOMC. The minutes, released three weeks after a meeting, are required to understand the context. The minutes provide the balance of risks, which appears to have moved to the downside for most in the Fed system. I have advocated for the “dot plot” to be released with the minutes, as that would alleviate some confusion about what the dots actually represent. Indeed, Powell clarified at this press conference that some who did not put a rate cut into the dot plot forecast are now actually considering cuts.
Powell underscored the FOMC’s willingness to be flexible and cut rates rapidly if necessary. Powell said that cross currents on trade and tariffs have reemerged and may have contributed to a deterioration in business confidence. He also emphasized that many now believe a more accommodative stance on policy is necessary. This sets the stage for a July cut.
Powell laid out the checklist for a rate cut in his statement. Headwinds from trade and tariffs have intensified. Business sentiment, which the FOMC now weighs more heavily in its forecast, has deteriorated. Inflation is too cool. The Fed now fears that inflation could remain too cool for longer than expected. We are ten years into an expansion but still not feeling its full warmth. The Fed’s views on inflation have changed significantly from just six weeks ago, with the word “transitory” removed.
Separately, Powell has been forced to address questions about his tenure in light of criticism from the White House. He answered bluntly that “The law is clear,” and that he intends to serve his full term (which is four years) as Fed Chairman.
The FOMC is clearly gearing up to cut rates but, as Powell noted, there was not enough support for a rate cut at this meeting. The committee members want more data and other information before reversing course. The G20 meetings that are scheduled for later this week are one of many factors the Fed will be watching. The committee’s members are now making sure that they check all the boxes before a likely cut in rates in July.
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