MNI REVIEW: Fed Ready To Cut Interest Rates If Outlook Worsens

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve stands ready to lower interest rates

this year if concerns over trade frictions and a slowdown in global growth

materialize, Chair Jay Powell said Wednesday after officials vowed to "act as

appropriate" to sustain the record-long U.S. economic expansion. 

     A rate cut this summer could also mean an earlier end to balance sheet

runoffs, Powell indicated in response to a question from MNI. 

     "Participants now see that a case for somewhat more accommodative policy

has strengthened," Powell told reporters after releasing fresh economic

projections showing the 17-member Federal Open Market Committee was about evenly

split into those who saw no change in rates this year and those who are

penciling in 50 basis points in rate cuts.  

     "If we do provide more accommodation, we will certainly keep in mind what

we said earlier this year, which is that we'll always be willing to adjust

balance sheet policy so that it serves our dual mandate objectives," he added.  

     Markets moved quickly to price steeper odds of a rate cut at the late July

FOMC meeting after Powell's remarks. Fed fund futures are pricing 0.31

percentage point cheaper funding in August, suggesting that the terms of the

debate have shifted to whether the Fed will ease by a quarter or half a point.

     --MACRO OUTLOOK POSITIVE

     The baseline economic outlook remains "favorable," but the FOMC is focused

on how to respond to an increasingly uncertain environment, Powell said. 

     Inflation declined in the first quarter but data since then showed some

pick-up, even if it has come at a slower pace than expected. Growth projections

were little revised overall at an above-trend pace of 2.1% for the year and 2.0%

in 2020, and consumer spending is at a healthy level, he said. 

     Labor market indicators "bear watching" but workers say jobs are plentiful

and household confidence is high. Even with a sharp slowdown in hiring last

month, job creation over the past three months is still above levels needed to

keep pace with workforce growth, Powell said. 

     --MONITORING DEVELOPMENTS

     Lower interest rates would support economic activity and a return of

inflation to the 2% objective, Powell said, but "there was not much support for

cutting rates now." 

     Some sources of downside risk are still quite recent. Just six weeks ago,

officials noted that many uncertainties affecting the U.S. and global economic

outlooks had receded. But soon after, President Donald Trump used tariffs on

Mexican goods as leverage in negotiations over curbing migration at the southern

border and threatened to slap more tariffs on Chinese imports if no deal is

reached with Beijing at the G20 meeting next week. 

     "We want to react to developments and trends that are sustained and that

are genuine," not just "changes in sentiment, which can be volatile," Powell

said.  

     But he added that the old adage that "an ounce of prevention is worth a

pound of cure" was a good way to think about policy in the current era of very

low global interest rates. 

     "It's wise to react to prevent a weakening from turning into a prolonged

weakening," he said. 

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

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