MNI PREVIEW: FOMC Set For Rate Cut, To Debate Pause Timing

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve officials are likely to deliver a third

consecutive interest rate cut next week and may leave the door open to another

cut in December in an effort to dampen the impact of trade wars and geopolitical

uncertainties on the U.S. economy.

     Top Fed officials have made little attempt to push back against

expectations for the rate cut next week and continue to highlight downside risks

and deteriorating data while they debate the timing of a pause to assess the

effects of monetary accommodation and recent measures to quell turmoil in money

markets. Markets are currently pricing in a 50-50 chance of a December cut.

     Chair Jay Powell reiterated earlier this month that the Fed will "act as

appropriate to support continued growth" and pledged to assess the situation on

a meeting-by-meeting basis. Echoing that, Vice Chair Rich Clarida last week

warned the U.S. economy "confronts some evident risks," despite a favorable

outlook.

     --UNCERTAINTIES LINGER

     The FOMC's case for rate cuts, namely slower growth abroad, trade policy

uncertainty and muted inflation, has not changed significantly since September.

     The IMF this week downgraded its global growth estimates to the lowest

level since the Great Recession. A U.S.-China trade deal looks possible if

uncertain, but the damage to exports, manufacturing and investment has been

done.

     The latest inflation and employment indicators also point to fading

momentum. Core PCE inflation remains a couple of tenths below 2% while measures

of inflation expectations have fallen to record lows. The manufacturing sector

has added an average of only 5,000 jobs a month this year, down from last year's

22,000 monthly pace. Overall hiring slowed to 161,000 jobs a month from 223,000

last year. Wage growth is decelerating even as unemployment fell to a 50-year

low.

     Unless Powell in his press conference raises the bar for further cuts, the

FOMC may simply reiterate that it will be data dependent and make assessments as

it goes.

     --REBUILDING RESERVES BUFFER

     Powell will also give an update on the FOMC's discussions on temporary and

permanent open market operations and other measures to supply more reserves to

the banking system and keep the fed funds rate within its target range.

     The Fed announced this month that it would buy Treasury bills at least

through the second quarter in a purely technical move that should not materially

affect the stance of monetary policy. However some details remain undefined.

Investors will want to know the key drivers of the Fed's commitments and how it

intends to adjust them so as to avoid creating a shortage of bills in the

market.

     More broadly, Powell is also likely to face questions over why the fed

funds rate has continued to experience higher volatility in recent months and

whether policymakers plan to introduce a standing repo facility in the near

future.

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

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