Fed May Shed Clues on Debate Over Rate Cut: Minutes Preview
The FOMC plans to stop shrinking its balance sheet in September, when it will halt the reduction of its holdings of Treasuries.
(Bloomberg) -- Federal Reserve Chairman Jerome Powell has cautioned against the need for an interest-rate cut. A record of the U.S. central bank’s most recent meeting could reveal if policy makers in fact discussed that option.
Minutes of the Federal Open Market Committee’s April 30-May 1 gathering will be released at 2 p.m. Wednesday in Washington. Officials held rates steady at the meeting and maintained their pledge to be patient as they weigh future rate moves.
“It will be interesting to see if there was any discussion of what it would take for them to get to lower rates, whether as an insurance cut or because of the inflation-being-too-low story,’’ said Roberto Perli, a partner at Cornerstone Macro LLC in Washington. “Of course, they will not be crystal clear. Reading between the lines could be interesting.’’
James Bullard, president of the St. Louis Fed and one of the most dovish policy makers at the U.S. central bank, said Wednesday in Hong Kong that a rate reduction “may become a more attractive option if inflation data continue to disappoint.”
Investors, who’re pricing in a rate cut by the end of the year, have other grounds to expect some debate on the question.
Fed Vice Chairman Richard Clarida told CNBC in an interview on April 11 that the central bank has sometimes taken out “insurance cuts’’ to protect an economic expansion, as Alan Greenspan did in 1995 and 1998. Chicago Fed chief Charles Evans, speaking several days later, said that a decline to 1.5% core inflation could call for lower rates.
The Fed’s preferred gauge of core inflation, excluding food and energy, slowed to 1.6% in the 12 months through March.
Powell, in his press conference following the meeting, said he didn’t favor an insurance cut and today’s situation is “quite different’’ from 1995. “We don’t see a strong case for moving in either direction,’’ he said.
Falling Inflation
Powell also played down inflation’s decline below the central bank’s 2% target, telling reporters it may prove to be “transitory.’’ Close attention will be paid to how many other policy makers voiced this view during the meeting.
“I do expect to see a lengthy discussion of inflation,’’ said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “It will be interesting to see if Powell’s ‘transitory’ view is representative of the committee as a whole, or just a part of it.’’
Balance Sheet
The FOMC plans to stop shrinking its balance sheet in September, when it will halt the reduction of its holdings of Treasuries. But key details, including about the maturity composition of its asset holdings over time, remain undecided.
Powell told reporters the committee held a preliminary discussion on the question and the FOMC would return to the topic toward the end of the year, though “there is no pressing need to resolve this matter” and investors will get plenty of warning of any decision.
What Bloomberg’s Economists Say
“A wide range of Fed officials have signaled support of the current “patient” approach to making further policy adjustments; the minutes will signal if resolve is starting to fray on either of the margins. Bloomberg Economics does not expect to see evidence of this at present.”
-- Carl Riccadonna, Yelena Shulyatyeva and Eliza Winger
The minutes could shed light on the debate, said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.
“My reading is that they are strongly leaning toward the option of matching average maturity distribution” of the market, rather than going to an all-bills composition, he said.
Asset Prices
Some Fed presidents, notably Esther George of the Kansas City, have worried about signs of financial excesses, arguing that prolonged low rates could repeat the asset bubbles that caused the last two U.S. recessions. The S&P 500 hit a record high on April 30, though it has since fallen back amid trade-war concerns.
“Worries about frothy asset markets might be mentioned’’ in the minutes, said Jonathan Wright, an economics professor at Johns Hopkins University.
U.S.-China trade tensions could also have been a topic for debate. But President Donald Trump’s decision to escalate the dispute by slapping punitive tariffs on Chinese imports happened after the Fed met.
To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net
To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Andrew Mayeda
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