MNI EXCLUSIVE: Former Fed Officials See No Shift In Messaging

By Jean Yung and Evan Ryser

     WASHINGTON (MNI) - The Federal Reserve is likely to stick to its message of

making mid-cycle adjustments to policy as it presses ahead with a second

quarter-point interest rate cut in as many meetings next week, former Fed

officials told MNI.

     Chair Jay Powell on Friday reiterated that the U.S. central bank will "act

as appropriate to sustain the expansion" amid uncertainties linked to a cloudy

global economic outlook and trade tensions. That suggests a continued cautious

approach to easing even as job growth slowed and factory activity contracted in

August, the former officials said. Inflation also remains below the Fed's 2%

target.

     "The latest jobs report probably will add more resolve on the part of the

core group of the committee to make one more insurance cut," former Atlanta Fed

President Dennis Lockhart told MNI. "A slowing of jobs gains does not in itself

portend a recession, but I suspect the FOMC sees this as more evidence of

slowing that, if mishandled, could go deeper than forecast."

     The Fed chief's emphasis on risk management suggests the FOMC is inclined

to take preemptive and preventive measures to build up a cushion against

negative shocks to the economy, he added. But given the reluctance of some Fed

officials to cut rates at all, the FOMC would need to see more serious downside

developments in the data to form a strong consensus to go further than one more

rate cut.

     "At this time I don't think the justification is there," Lockhart said.

     --DIVERSITY OF OPINION

     David Wilcox, former Fed Board research director, told MNI he does not

"find it at all surprising" that FOMC participants hold a range of opinions on

appropriate policy.

     In recent weeks, at least one Fed official has argued for lowering the fed

funds target by 50 basis points this month while several others maintained that

there is little urgency to use the Fed's ammunition at this point.

     "It's easy to construct two fundamentally different narratives about the

macroeconomy right now," Wilcox said.

     With inflation stubbornly below target and concerns about flagging economic

momentum, "it's completely sensible to synthesize a narrative that supports

easing the stance of policy fairly aggressively, both to insure against further

slowdown and to more definitively nudge inflation up to the 2% target," he said.

     On the other hand, it's also "completely sensible" to focus on the fact

that unemployment is near a 50-year low and payroll gains remain above the rate

needed to absorb new workers, he said. The most recent inflation readings have

also picked up a little, potentially substantiating the view that transitory

influences held down inflation earlier in the year.

     "If that's your preferred narrative, then you're very much in the mode of

let's hang back and see how things develop," he said.

     --DOTS MAY DRIFT DOWN

     Though the former officials anticipate relatively little change to the

Fed's economic projections next week, William English, a former Fed Board senior

special advisor, told MNI he does not rule out a dovish dot plot showing further

insurance cuts.

     "They've only used 25 basis points at this point and they had good reasons

to ease. When they did similar kinds of mid-cycle recalibrations in 1995 and

then 1998, they used a total of 75 basis points. So they may have a bit more to

do before they're done here."

     Wilcox expects another downward adjustment in the fed funds rate trajectory

"because FOMC participants will see a more accommodative policy as necessary to

elicit the economic performance they're expecting."

     Futures traders have priced in roughly 100 basis points of easing over the

next 12 months.

     "It is not as if the economy is going into the ditch, but it is slowing

because investment spending is slowing," English said.

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

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