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MNI EXCLUSIVE: Fed Economists See No Macro Case For Cut - Yet

By Jean Yung
     WASHINGTON (MNI) - Softer U.S. macro data do not present a clear case for
an imminent interest rate cut, but persistent trade tensions may prove
disruptive enough to warrant a course correction, senior Federal Reserve
economists told MNI last week.
     Officials at the Richmond and Dallas Fed banks said in interviews that, in
aggregate, the past few months' employment, consumer spending and other
indicators look strong, even as they noted softness in recent manufacturing,
investment and other data. Given that the economy was widely expected to lose
momentum this year after a fiscal stimulus-fueled growth spurt, some
sluggishness is to be expected.
     The economy is "slowing back down to something that looks to me more in
line with the medium-term history of labor force growth and productivity
growth," Richmond Fed research director Kartik Athreya said. Add to that "the
backdrop of the most recent trade-related uncertainty, then it's even more
natural to me that we should be seeing a little bit of chop in the data before
things resolve themselves."
     Friday's report of a sharp slowdown in hiring in May reinforced market
expectations for the FOMC to deliver two to three rate cuts this year. U.S.
employers added just 75,000 jobs last month, bringing the year-to-date average
monthly pace of payroll growth to 164,000 from 223,000 last year. Average hourly
earnings growth also slowed to 3.1% from a recent high of 3.4% in February.
     There was "not much great news" in the May report, which also came on the
heels of weaker manufacturing data, Dallas Fed research director Marc Giannoni
told MNI. ISM manufacturing hit its lowest level in May since October 2016 and
regional Fed surveys of factories have been mixed.
     "It's possible we are operating at a slightly lower growth trajectory than
we had anticipated earlier," he said. "At this point I don't know if this is
transitory or something more persistent in line with slowing global growth. We
need to be really, really vigilant."
     One bright note continues to be consumer spending and household confidence.
The ISM survey of the services sector, which comprises 70% of the U.S. economy,
beat expectations in May. The unemployment rate remains at the 50-year low of
     "In some sense it's not surprising that the parts of the economy that are
sending the softer signals are coming overwhelmingly from the investment side,"
as that is one of the most volatile components of economic activity, Athreya
said. "If serious downside risks on the trade front don't materialize, then
that's not something that would give me overwhelming signal by itself."
     Despite President Donald Trump's decision to reverse course on threatened
tariffs on Mexican goods following a last-minute immigration pact late Friday,
the prospect of quickly escalating tariffs on highly-integrated supply chains
spooked investors and "permanently raised the level of ambient uncertainty,"
Athreya said.
     The trade war also wages on other fronts. Tensions are still running high
between Washington and Beijing ahead of a planned meeting of the presidents
later this month. Meanwhile Trump is still mulling tariffs on auto imports from
Japan and the European Union if no deal is reached this year.
     The Fed is on the lookout for signals of deterioration across the gamut of
indicators, including household expectations, capital investment, surveys of
business conditions and firms' pricing behavior, Giannoni said. To the extent
that tariffs are weakening activity but driving up inflation, "we'll want to be
on the lookout for that as well," he said.
     "We are in a regime of data dependence," Athreya said. "Policy is not
something that's simply on autopilot."
--MNI Washington Bureau; +1 202-371-2121; email:
[TOPICS: MMUFE$,M$U$$$,MT$$$$,MX$$$$]

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