MNI INTERVIEW: China Rates Impact Overdone-Ex-Fed Wilcox

By Jean Yung

     WASHINGTON (MNI) - Modestly lower interest rates are likely warranted in

light of the escalation in retaliatory trade actions from Beijing and Washington

this week, but monetary policy is overall well positioned to sustain economic

expansion, former Federal Reserve Board economist David Wilcox said in an

interview Tuesday.

     After months of trade negotiations, tensions hit a new high this week after

the Trump administration labeled China a currency manipulator in response to

Beijing's allowing its currency to weaken to help offset the impact of fresh

tariffs planned for Sept. 1. Equity markets rendered a swift verdict on the

news, with the S&P 500 falling nearly 3% Monday, and rates futures traders

rushed to price in three more rate cuts this year and another in 2020.

     "The Fed will probably at the margin need to have a modestly more

accommodative policy," said Wilcox, who retired at the end of 2018 as director

of research at the Fed Board. However, "Four cuts cumulatively begins to sound

like a very material weakening in the outlook. At this point, I would say that's

not unreasonable, but much more supposition than direct observation."

     Stock markets are "right to take these moves as negative signals about how

robust the future is likely to be," he said. Yet, despite persistent trade

uncertainty adding turbulence to the economic trajectory, the slowdown has been

"remarkably gentle and remarkably smooth" thus far. That supports a wait-and-see

approach, he added.

     --WELL POSITIONED

     Wilcox judged the Fed's rate cut last week as a "modest recalibration" of

policy motivated by uncertainty and soft inflation and said that criticism that

Powell lacked certainty about the path of future policy missed the point.

     "It's possible the FOMC might have a slight lean to another cut, but

they're going to wait and see how developments unfold from here forward," he

said. "That's about the limit to what the Fed chair can say. He can't deliver

more certainty than that."

     The data suggest the U.S. economy has avoided overheating on the one hand

and a sudden retreat on the other. Instead it has decelerated to a sustainable

pace of growth that continues to give some groups of people the opportunity to

join the jobs market, Wilcox said.

     "The jobs market has been the linchpin of the expansion lately and is key

to sustaining consumer spending," he said. If business confidence and investment

spending were to fall more significantly on trade uncertainty or other factors,

that could spread to hiring and that would be very concerning.

     But "there are no tangible signals that any of these more worrisome

scenarios is unfolding right now," he said.

     Powell's message could be summed up as "The economy is doing well, and

monetary policy is well positioned," he said.

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

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