REPEAT: MNI REVIEW: Fed's Powell Pushes Back Against Cut Bets

By Jean Yung

     WASHINGTON (MNI) - Chair Jay Powell on Wednesday pushed back against market

expectations for the Federal Reserve to cut interest rates in the next year,

downplaying the factors holding down inflation as "transient" and noting that

downside risks to the outlook have moderated since the start of the year. 

     Global financial conditions have eased, the outlook for Chinese and euro

area economies show improvement and U.S.-China trade talks are making progress.

With continued strong U.S. economic fundamentals, these developments are

"consistent with continued patience" on the part of the FOMC, he said. 

     "We think that our policy stance is appropriate at the moment," Powell told

reporters after the FOMC voted unanimously to hold rates steady in a 2.25% to

2.50% target range. "We don't see a strong case for moving in either direction."

     Meanwhile, the Fed surprised markets with another 5 basis point cut to its

interest paid on excess reserves in an effort to keep a lid on overnight rates,

which have moved higher within the FOMC's target range. Powell emphasized that

this technical adjustment has "no implications for policy."  

     --INFLATION WEAKNESS TRANSITORY

     Core PCE inflation weakened unexpectedly over the first quarter to 1.6%

year-over-year in March from 2.0% at the end of 2018, but Powell indicated

Wednesday the FOMC has yet to judge inflation as running persistently below its

2% objective. 

     Alternative internal measures of core inflation, such as the Dallas Fed

Trimmed Mean Inflation Rate, are still running close to 2%, Powell noted. He

added that certain price categories may have fallen for idiosyncratic reasons. 

     Portfolio management services prices tend to fall with asset prices after a

lag, and they're expected to rebound now that asset prices have risen. Another

category, apparel prices, saw a change in price collection methodology that may

have affected their inflation rate, he said. 

     "We do see good reasons to think that some or all of the unexpected

decrease may wind up being transient," Powell said. The Fed's "baseline view"

remains that inflation will "return to 2% over time."

     --OPERATIONAL DECISIONS

     Wednesday's downward adjustment to IOER came on the heels of the effective

fed funds rate coming within 5 basis points of the upper end of the Fed's target

range, and Powell indicated that the Fed is prepared to use its tools as needed

to keep the rate within its target range.

     The committee will also study the creation of a standing repo facility in

an upcoming meeting, he said. Such a facility would lower bank demand for bank

reserves by allowing banks to swap Treasury collateral for reserves on demand,

hence easing some funding pressures. 

     The FOMC this week discussed strategies to normalize the composition of its

portfolio, which is currently weighted toward longer dated securities, Powell

said, but will defer final decisions until officials revisit the issue toward

the end of the year, Powell said. 

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

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