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MNI FOMC REVIEW: Fed Makes 'Mid-Cycle Adjustment' to Rates

By Jean Yung
     WASHINGTON (MNI) - The Federal Reserve on Wednesday cut interest rates for
the first time since the financial crisis and signaled additional adjustments
may be in store to keep U.S. growth on track amid muted inflation pressures,
trade tensions and a global slowdown. 
     But Jay Powell's uneven defense of the committee's decision elicited swings
in market pricing, with the S&P 500 down sharply at one point and rate cut odds
for the rest of the year trading in a broad range as traders struggled to parse
the Fed chair's message. 
     He characterized the move to lower the fed funds rate target to 2.00% to
2.25% as a "mid-cycle adjustment," adding it is intended to "insure against
downside risks from weak global growth and trade policy uncertainty, to help
offset the effects these factors are having on the economy, and to promote a
faster return of inflation to our 2% objective." 
     Asked if Wednesday's cut marked the start of an easing cycle, as some
analysts expect, he said, "That is not our perspective now." 
     Small edits to the Fed's policy statement released Wednesday similarly
signaled that downside risks have receded somewhat since June. 
     Uncertainties to the outlook "remain" and the Federal Open Market Committee
will "continue to monitor" incoming information, the statement said. By
contrast, the FOMC said last month that uncertainties "have increased" and
pledged to "closely monitor" the situation as it developed. 
     Foreign growth, especially in manufacturing, has "disappointed," Powell
said, noting that major central banks are responding with accommodative policy.
But whereas trade tensions "nearly boiled over" in May and June, they "now
appear to have returned to a simmer," Powell said.  
     Going forward, the Fed intends to keep an eye on weak global growth, trade
and inflation, he said. "I would love to be more precise," but the Fed is also
"learning by doing" on how to respond to trade tensions, he said. 
     Two hawkish dissents from Fed presidents Esther George and Eric Rosengren
reflected likely broader disagreement among policymakers over whether
Wednesday's rate cut was appropriate in light of growth coming in "a little
better" than Fed had forecast and the economic performance "reasonably good," as
Powell said. 
     But Powell defended the rate cut as designed to "keep the outlook
favorable" and flagged inflation worries. The committee is mindful that
"inflation's return to 2% may be further delayed and that continued below target
inflation could lead to a worrisome and difficult to reverse downward slide in
longer term expectations," he said.  
     The personal consumption expenditures price index, the Fed's preferred
inflation gauge, rose 1.4% over the past year, while PCE inflation excluding
food and energy rose 1.6%, short of goal. Wages are rising but "not at a pace
that would put much upward pressure on inflation," Powell added. 
     He declined to link Wednesday's rate decision to a broader re-think on its
inflation strategy, in response to a question from MNI, but said the FOMC is
seriously examining ways to improve its policy framework. Targeting 2% on
average over a longer period of time is one option officials have been
--MNI Washington Bureau; +1 202-371-2121; email:
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