MNI INTERVIEW: Wide Range for Rates After July: Ex-Fed Wilcox

By Jean Yung

     WASHINGTON (MNI) - U.S. monetary policy will be close to balanced after a

quarter-point rate cut this month, but the Fed could lower rates several more

times by December should data weaken significantly, former Federal Reserve Board

Research Director David Wilcox said in an interview.

     Jay Powell's testimony to Congress last week clearly leaned into the notion

of a rate cut on July 31, Wilcox noted, adding he also detected a subtle dovish

shift in the Fed chair's reaction function.

     "His comments suggested to me that, in response to disappointing news about

either the economy or inflation, they'd be even a little more vigorous than I

previously thought in providing additional accommodation," Wilcox, who retired

at the end of 2018 after 30 years at the Federal Reserve, told MNI.

     While holding even for the remainder of the year or cutting once more are

the most likely outcomes, "it's by no means out of the question that they could

cut two or even three more times this year" in the face of adverse data home or

abroad, further deterioration in trade negotiations or a geopolitical flare-up,

Wilcox said.

     Fed funds futures are pricing in 70 basis points of rate cuts in the second

half of 2019 and another 30 bps of cuts in 2020.

     --ON GUARD

     Powell's comments last week put a little more emphasis than Wilcox had

expected on the importance of sustaining the recovery and a indicated little

more comfort with running some additional inflation risk.

     The Fed chair flagged trade developments, the federal debt ceiling, and

Brexit as yet unresolved issues that continue to create uncertainty for

businesses. The persistence of below-target inflation, especially in a time of

historically tight labor markets, also weighs on the outlook. Wage growth has

yet to pick up steam, leading Powell to remark last week, "We don't have any

basis, or any evidence, for calling this a hot labor market."

     "His comments suggested to me that, in response to disappointing news about

either the economy or inflation, they'd be even a little more vigorous than I

previously thought in providing additional accommodation," Wilcox said.

     Powell's reference to a lack of heat in the labor market also signaled "a

little further evolution in his assessment of how much pressure the labor market

can sustain without generating unwanted wage or price increases."

     --50BP CUT UNLIKELY

     The balance of the data so far points more to a milder quarter-point point

rate cut this month than a 50 bps cut, Wilcox said.

     "Activity in the labor market continues to be very well sustained and

there's no further erosion on the inflation front," he said. "A 50 bps cut might

communicate a degree of concern on the part of policymakers that I don't see the

case for."

     A 25 bps cut would leave rates in a 2.00%-2.25% target range, and the Fed

"quite well positioned" going forward, he said. Policy would be an open question

after that, with officials paying close attention to incoming news.

     The FOMC very much wants to see core and especially overall inflation

fluctuate around 2% in a symmetric manner, he said. If the robust pace of job

creation results in a strong pickup in wage growth and signs are convincing that

that's translating into actual inflation, policymakers would undoubtedly

respond.

     "If the labor market is really solid over the rest of the year and the wage

and price data gain some steam, they could even conceivably reverse course," he

said. But, "the hurdle would be pretty high."

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

[TOPICS: MMUFE$,M$U$$$,MT$$$$,MX$$$$]