Fed Fund Cuts — not If but When

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Special Guest Blogger: Tim Kearney

To state the obvious, the Federal Reserve is set to deliver a rate cut on July 31. In his Congressional testimony, Federal Reserve Chair Jay Powell said that there is room to cut for a number of reasons, citing trade tensions and the global slowdown. In addition, he described the Phillips curve relationship between inflation and unemployment as “weak” and “becom[ing] weaker and weaker and weaker.” (I agree, and expect that “employment Friday” may be a bit less stressful for a few rounds). Analytically, he offered that since there have been few issues arising from the low unemployment rate, monetary policy may have been tighter than necessary.

What is the background to a rate cut? Domestically, U.S. GDP growth appears to have slowed but is still above trend. Retail sales data are accelerating, with the three-month growth rate now higher than the 12-month growth rate. The inflation rate appears to be heading slowly to the Fed’s 2% target. Since the Fed’s model points to small impacts from a single rate cut, there have been some arguments for a 50 basis-point (bp) cut over the past week. I’m looking for 25 bp this month and another cut in September, with December still a possibility for a third; but that will depend on conditions in the intervening months.

Please follow the fed funds target rate on page 34 of the Global Perspectives book.

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