NEW YORK/TORONTO: Slowing global economies, the escalating trade war between Washington and Beijing and a warning sign of recession flashing in the US Treasury market have all fed expectations the Federal Reserve is poised to lower rates at the close of its September 17-18 meeting.
But sentiment is much less well-defined within the Fed over whether to reduce borrowing costs for the second time this year, and if so by how much.
In remarks this week, their last chance to speak publicly before their next rate-setting meeting, US central bankers broadly agreed that trade policy uncertainty is hurting US businesses. Whether they believe a rate cut is in order appears to hinge largely on their view of the consumer.
John Williams, president of the hugely influential New York Federal Reserve, said on Wednesday consumer spending is “robust” and one reason the US economy is in a “favourable” place.”
Still, after his prepared remarks he told reporters: “I don’t see consumer spending really continuing to grow faster into the future like it has been.”
Household spending accounts for about 70 per cent of the US economy and surged last quarter despite a drop in business investment.
The Fed, he said, is ready to “act as appropriate” to help America avoid an economic downturn, echoing closely language used by Fed Chair Jerome Powell used last month which fed expectations of another quarter-point interest-rate cut in September.
But Williams also told reporters he expects the economy to grow at an above-trend pace of 2.0 per cent -2.5 per cent in 2019.
“Doesn’t sound like someone ready to ease 50 basis points. Or at all,” quipped Northern Trust economist Carl Tannenbaum on Twitter.
Boston Fed President Eric Rosengren, who in July opposed the first Fed rate cut since 2008, said on Tuesday there is no reason to cut rates as long as the economy keeps growing at around 2 per cent.
An hour after Williams spoke, Dallas Federal Reserve Bank President Robert Kaplan said in Toronto, Canada, that the US economy was “mixed” and he was focused on whether consumer spending, the strongest part of the world’s biggest economy, will be hit by trade uncertainty that last month drove a decline in domestic manufacturing.
Kaplan said he has lowered his growth outlook for the year and could do so again. Fed officials will submit fresh economic forecasts and views on appropriate rates just ahead of their September 17-18 meeting.
“My own view is I’m going to assess the data leading right up to the meeting, and make a judgment on what the appropriate action, if any, would be for us to take,” he told reporters. If the Fed waits to see weakness in consumer spending, he said, “that’s probably too late.”
He said he is looking at factors including the fact that the Fed’s 2 per cent to 2.25 per cent target range for the benchmark fed funds rate is above yields of even the longest-dated US Treasuries, setting the stage for possible distortions. — Reuters
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