Fed Policy Makers Sound Open to Trimming Interest Rates Again

(Bloomberg) -- Federal Reserve policy makers generally sound open to reducing interest rates again, though they’re far from committing to do so.

That’s the message gleaned from comments on Friday by U.S. central bankers, including influential Vice Chairman Richard Clarida.

“They expressed willingness to move if need be,” said Lou Crandall, chief economist at Wrightson ICAP LLC. “But if the data and the global environment allow them to stand pat, I think they will. I just wouldn’t bet on that.”

In an interview with CNBC television, Clarida extolled the performance of the U.S. economy, calling it the “star pupil” in the world.

But he said the Fed needed to take account of the risks to that favorable outlook, particularly from slumping growth and disinflationary forces from abroad.

“The economy is in a good place but in the 11th year of an expansion there are also some risks,” he said.

A divided Fed cut interest rates for the second time in two months on Wednesday, reducing its federal funds target by a quarter percentage point to a range of 1.75% to 2%. Three regional Fed presidents dissented from the decision, with two wanting no change and another backing a half-point reduction.

The debate inside the Fed largely boils down to whether the U.S. can withstand a global slowdown driven in part by uncertainties stemming from President Donald Trump’s “America First” trade policy.

While recent U.S. economic indicators have mostly outperformed expectations, the world economy as a whole isn’t faring that well.

The Paris-based Organisation for Economic Cooperation and Development said this week it sees the world economy sliding toward its slowest growth in a decade amid intensifying trade conflicts.

“In terms of global growth it is getting worse,” Clarida said.

Fed policy makers agree that the U.S. economy is in good shape but differ in their assessments of the risks to the outlook, according to Clarida.

St. Louis Fed President Jim Bullard said separately Friday that he pushed for a bigger rate cut this week to “provide insurance against further declines in expected inflation and a slowing economy.”

Trade War

“I think the trade war is having a large impact outside the country and some impact inside the country,” including on the agriculture industry, he told Wharton Business Radio on Sirius XM.

In spite of supporting a bigger rate cut this week, Bullard said he “would reserve judgment” on whether another reduction is needed after this week’s quarter point move.

Dallas Fed President Robert Kaplan said that he was willing to entertain the possibility of another rate cut this year, though he was not forecasting that outcome.

“I’m open minded but agnostic about whether there’s a need to do something more,” he told reporters Friday after giving a speech in Corpus Christi, Texas. “I’m going to be highly vigilant.”

Trade tensions have hurt manufacturing companies but consumer spending remains strong, said Kaplan, who is not a voting member on the policy making Federal Open Market Committee this year.

Dissenting Voice

It is domestic rather than foreign risks that Boston Fed President Eric Rosengren is focused on.

In explaining why he dissented against the cut this week, he saw perils in pushing rates down too far.

“Additional monetary stimulus is not needed for an economy where labor markets are already tight, and risks further inflating the prices of risky assets and encouraging households and firms to take on too much leverage,” he said in a statement on Friday.

Asked about Rosengren’s concerns, Clarida replied that the Federal Open Market Committee as a whole doesn’t consider financial stability risks to be elevated.

“The U.S. economy is a resilient economy, ” he added in the CNBC interview. “But we don’t take it for granted.”

--With assistance from Craig Torres and Steve Matthews.

To contact the reporters on this story: Rich Miller in Washington at rmiller28@bloomberg.net;Christopher Condon in Washington at ccondon4@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alister Bull, Sarah McGregor

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