Fed Likely to Cut, but Keep some Powder Dry

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Special Guest Blogger: Tim Kearney

It seems that the Federal Open Market Committee (FOMC) has shifted its monetary policy approach from data dependence to pre-emptive risk management. Last summer, Federal Reserve Chairman Powell appeared to endorse such an approach. His Congressional testimony last week emphasized that (headline) inflation is below the FOMC’s “symmetric 2% objective” and that “cross-currents” weigh on economic activity and the outlook. The question remains: will this approach deliver the three rate cuts by year-end that the market expects?

My expectation is that the FOMC will validate expectations for a 25 basis-point (bp) cut in July but not deliver 50 bp. The FOMC will remain open to a 25 bp cut in September, which likely will happen. I doubt that the Fed is on autopilot to cut based on market expectations. Between now and the December 11 meeting there will be a lot of data that should clear up the direction of economic cross-currents. These are the keys: investment trends, productivity data, nonfarm payrolls, business confidence and trade tensions. I would feel more confident about the outlook being above trend if we see business confidence remaining high among investment firms.

For background on the fed funds target rate, please see page 34 of the Global Perspectives book.

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