MNI PREVIEW: FOMC Set For 25 BPS Rate Cut; Open to More

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve policymakers are set to lower the fed

funds target by another quarter point to a range of 1.75% to 2% this week and

signal some willingness to deliver a third insurance cut before the year is out.

     The U.S.-China trade war continues to weigh on business sentiment, with

manufacturing contracting in August for the first time in nearly three years and

investment under pressure. But the two sides are now floating the possibility of

a limited deal through 2020. More significantly, consumer data have held up

remarkably well and underpin the momentum in the U.S. economy.

     Former Fed officials told MNI they anticipate little shift in Chair Jay

Powell's messaging, based on largely unchanged economic projections over the

medium term. However, Powell's emphasis on risk management suggests the FOMC is

inclined to take preemptive measures to build up a cushion against negative

shocks to the economy.

     Keeping in place its pledge to "act as appropriate to sustain the

expansion" while staying vigilant to further deterioration in economic activity

gives the Fed the option to cut rates further in October and December if needed.

     --DISSENTS EXPECTED

     But more serious downside developments in the data would likely be

necessary to forge a strong consensus to lower rates further next year, as a

number of Fed officials remain reluctant to cut at all.

     The unemployment rate has stayed near its 50-year low. The pace of payroll

gains, while slowing to an average of 158,000 a month this year from 223,000 in

2018, remains above that needed to absorb new workers.

     The most recent inflation readings have also picked up a little, lending

credence to the idea that idiosyncratic factors had held down price growth

earlier in the year. Core CPI on a 12-month basis reached an 11-year high of

2.4% in August.

     What's more, since July, the 2-year-10-year yield curve is no longer

inverted and financial conditions remain supportive.

     Esther George and Eric Rosengren of the Kansas City and Boston Feds,

respectively, dissented in favor of no change in rates in July and could do so

again. St. Louis Fed President Jim Bullard may register a dovish dissent, in

favor of a half-point rate cut.

     --FRAMEWORK DISCUSSIONS

     The FOMC is also expected to continue debating potential changes to its

policy framework.

     Proposed alternatives include moving to average inflation targeting or

price level targeting, either of which would let inflation run above target for

a time to make up for below-target periods.

     But top advisers at the Richmond Fed told MNI they see significant

obstacles in the way of an overhaul of how the Fed targets inflation, including

concerns about whether central bankers will able to clearly communicate the

goals and parameters of the proposed framework to the broader public.

     The Fed is expected to announce any changes to its policy framework next

year.

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

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