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MNI US Employment Insight: Soft Enough To Keep Fed Cutting
MNI ASIA MARKETS ANALYSIS: Jobs Data Green Lights Rate Cuts
MNI REVIEW: Fed Favors Extended Rates Pause; Ends QT in Sept
By Jean Yung
WASHINGTON (MNI) - In a decidedly dovish turn, Federal Reserve officials
Wednesday signaled they favored keeping interest rates unchanged for the year
and possibly longer in the face of a global slowdown and announced an end to the
balance sheet runoff program in September.
The FOMC remained uncertain over the minimum level of bank reserves needed
to implement policy effectively.
Eleven of 17 officials saw no move in rates this year, compared with a
previous forecast for two rate hikes this year, and a plurality of seven
officials saw no hikes next year, according to the latest projection. Odds of a
rate cut by year-end rose to about 50% from 30% after Wednesday's meeting.
With a downgraded economic outlook and a flatter rates projection, the FOMC
repeated its "patient" stance and made no other changes to guidance in the
post-meeting statement.
"Patient means that we see no need to rush to judgment, and it may be some
time before the outlook for jobs and inflation calls clearly for a change in
policy," Powell told reporters afterward.
"The data are not currently sending a signal that we need to move in one
direction or another, in my view," he later added.
--GLOBAL HEADWINDS
Despite a U.S. economy that's slowing markedly this year, Powell emphasized
that growth of above 2%, unemployment below 4% and inflation close to target
comprise a picture that's "overall favorable."
Underlying fundamentals are still "very positive," he said, citing a strong
labor market, rising incomes and easier financial conditions than a few months
earlier.
However, weaker global growth and the lack of resolution on Brexit and
other trade negotiations are creating headwinds for the U.S. economy, though the
cumulative effect is difficult to estimate, Powell said. Still, "we don't see a
recession" in Europe, and Beijing has taken steps to stabilize growth "at an
attractive level."
Meanwhile, a decade into the current expansion, U.S. inflation has yet to
"convincingly" meet the Fed's target, Powell said. Some officials posit perhaps
there is still more slack in the labor market, while some others blame lowered
inflation expectations, he said, but there is no clear answer.
"Our policy rate is in the range of neutral, the economy is growing at
about trend, inflation is close to target, unemployment is under 4%. It's a
great time for us to be patient and watch and wait and see how things evolve,"
Powell said.
--RUNOFFS END
By the time runoffs conclude in September, the Fed will be left with a
balance sheet size a bit above $3.5 trillion, Powell estimated, largely meeting
market expectations.
From there, the Fed will allow growth in currency and other nonreserve
liabilities to slowly whittle down the pool of bank reserves until they reach a
minimum level needed "to conduct policy efficiently and effectively." But Powell
signaled the Fed had made no determination on how long that process would last.
"The level of reserve demand is something that we have put a lot of effort
and time into creating estimates based on market intelligence and surveys. The
truth is we don't know. It may evolve over time. We will just have to see,"
Powell said.
--REINVESTMENT POLICY
Other matters left for future deliberation include the longer-run maturity
composition of the balance sheet. Eventually the Fed will let the balance sheet
expand again to keep pace with growing demand for its liabilities.
Starting in October, up to $20 billion of maturing agency mortgage-backed
securities will be reinvested in Treasury securities across a range of
maturities to roughly match the maturity composition of Treasury securities
outstanding, marking the first time in years the Fed will be buying bills in
addition to longer-term assets.
The FOMC said it intends to "revisit this reinvestment plan" as it
continues discussions over the coming meetings.
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com
[TOPICS: MMUFE$,M$U$$$,MX$$$$]
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.