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MNI EXCLUSIVE: Ex-Fed Officials See Pause After Oct Rate Cut

By Jean Yung and Evan Ryser
     WASHINGTON (MNI) - Former Federal Reserve officials expect the FOMC to cut
rates for a third time this year on Wednesday then return to a posture of
monitoring incoming data and policy developments over the coming weeks or
     "This cut will continue in the theme of 'an ounce of prevention is worth a
pound of cure' strategy. It's not necessarily indicated by the data itself but
by the risk array, and it's meant to pre-empt any slowdown that's greater than
already forecast," former Atlanta Fed President Dennis Lockhart told MNI.
     Job growth has slowed while inflation has remained below target.
Softer-than-expected retail sales have also raised doubts over whether household
spending will continue to hold up amid escalating trade wars and a global
     But three cuts in as many FOMC meetings this year may add enough
accommodation to sustain trend growth for now, Lockhart said. "If the situation
worsens more than forecast, then there can be further cuts. But I don't think
the case is clear for that at this point."
     Policymakers are likely to signal a pause by emphasizing that future rate
cuts would be highly data dependent, along the lines of comments by Chair Jay
Powell and Vice Chair Rich Clarida in recent speeches, the former officials
     After the rate cut this week, "the cone of uncertainty centers around a
trajectory that is quite flat going forward, and it seems that their
communication is intended to convey that broadly," former Fed Board research
director David Wilcox told MNI.
     "They see policy as having been recalibrated to their satisfaction and, as
far as they can tell, that'll be enough," Wilcox said. "I think it's important
for them to not communicate more certainty than they credibly can deliver."
     Powell will likely "make it clear in the press conference that any future
easing would be a decision made in the future and that expectations should be
roughly flat at this time," former Fed Board economist Bill Nelson told MNI.
     "I suspect the Fed will indicate that it has finished its mid-course
adjustment and sees monetary policy as well-positioned to support further strong
growth, but is prepared to cut further if there are signs of economic weakness,"
Nelson said.
     With market odds for a further December rate cut at roughly 20%, "I think
that they would be comfortable adopting language that would move expectations
for December down," Nelson said.
     Balance sheet policy will likely be up for debate again at this week's
meeting as policymakers grapple with the question of determining the quantity of
additional reserves needed to absorb volatility in money markets and provide
effective interest rate control.
     A month after the initial unexpected surge in repo rates, markets
experienced another liquidity squeeze mid-October even as the New York Fed
continued repo operations and began purchases of Treasury bills.
     That may indicate the need to study how regulatory constraints on liquidity
ratios have influenced banks' behavior on short-term investments.
     "The addition of reserves certainly seems to have calmed markets, but they
still have to decide where to stop and how durable that picture will be before
starting organic growth of the balance sheet," Lockhart said.
     "They have got to get the question of reserves correct, because monetary
control is central to the implementation of monetary policy."
--MNI Washington Bureau; +1 202-371-2121; email:
--MNI Washington Bureau; +1 202 371 2121; email:
--MNI London Bureau; +44 203 865 3829; email:
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