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

months.

     "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

slowdown.

     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."

     --MEETING-BY-MEETING

     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

said.

     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.

     --INTEREST RATE CONTROL

     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: jean.yung@marketnews.com

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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