ADVERTISEMENT

Fed Watchers See Quarter-Point Cut, Status Quo on Runoff Plan

George, Rosengren are viewed as possible FOMC vote dissenters.

Fed Watchers See Quarter-Point Cut, Status Quo on Runoff Plan
The Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

(Bloomberg) -- The Federal Reserve will cut interest rates next week and again later this year, but the U.S. central bank is not entering an extended cycle of easing monetary policy, according to economists surveyed by Bloomberg.

“If the Fed is successful it will hike rates again before the next recession,” said Constance Hunter, chief economist at KPMG LLP, in her survey response.

Despite the anticipated cut, those polled didn’t expect officials to halt the Fed’s ongoing balance sheet runoff before its scheduled end in September.

Respondents to a July 19-23 poll overwhelmingly chose a quarter-percentage-point rate cut as the most likely outcome of next week’s Federal Open Market Committee gathering. That outcome received a median probability of 80%. A half-point cut garnered a median 10% response, and a decision to leave rates unchanged a median 5%.

Fed Watchers See Quarter-Point Cut, Status Quo on Runoff Plan

In a similar June survey, with international trade disputes casting a shadow over the global economic outlook and inflation staying low, economists were already anticipating a half-point, downward adjustment for rates, with cuts coming in December and July 2020. The median projection from respondents then saw the Fed’s target range remaining at 1.75% to 2% at least through the end of 2021.

Now, after Fed officials signaled a greater willingness to guard against a deeper slowdown, economists anticipate decreases this July and October.

Fed Watchers See Quarter-Point Cut, Status Quo on Runoff Plan

That still doesn’t catch up with financial market sentiment. Pricing in federal funds futures contracts imply that investors expect the Fed to cut its benchmark rate by three-quarters of a percentage point by year’s end.

The FOMC is scheduled to release a statement at 2 p.m. July 31. Chairman Jerome Powell will hold a news conference at 2:30 p.m. Officials won’t update their quarterly forecasts, including the dot plot of interest-rate projections, until their next meeting in September.

What Our Economists Say

“Bloomberg Economics expects the Fed’s insurance cuts to total 50 bps (in two 25bps increments), assuming that 10-year yields do not drop below 2% in the interim. While many forecasters are questioning whether a half-point rate reduction will have a material impact on the outlook for growth or inflation, that fact that both the trade weighted dollar as well as equity markets have responded to the Fed signaling suggests that there will be some stimulative effect.”
-- Carl Riccadonna

Economists continued to dismiss the idea that President Donald Trump’s incessant criticism of Fed officials would affect policy decisions. Nearly three quarters said it would have no impact, while 20% said it would make a cut more likely and 6% said it would make a cut less likely.

While a rate cut is widely expected among economists and investors, many also anticipate that one or two voting members of the FOMC will oppose a decrease. Kansas City Fed President Esther George and Boston’s Eric Rosengren were tapped by nearly half of the economists as likely dissenters.

Two survey respondents also predicted Governor Randal Quarles, the Fed’s vice chairman for banking supervision, would vote against a cut. Dissents by governors are much less common than those by regional presidents. No governor has done so since Mark Olson opposed a rate increase in the wake of Hurricane Katrina in September 2005.

Economists were also asked what signal they would take from a decision by policy makers to repeat in their post-meeting statement that they plan to “closely monitor” incoming information and “act as appropriate to sustain the expansion.” That language was interpreted as flagging a likely cut in July when it first appeared in the June statement.

Only four of the 36 respondents to the question said that would signal a September cut was likely, while 29 said such language would only open the door to a September cut.

Fed Watchers See Quarter-Point Cut, Status Quo on Runoff Plan

“Beyond the July meeting, prospects for further policy adjustments will likely be conducted on a meeting-by-meeting basis,” said Brett Ryan, senior U.S. economist at Deutsche Bank Securities in New York.

If the Fed cuts rates that would mean the central bank’s two main monetary policy tools were, technically, working in opposite directions. The Fed has been shrinking its balance sheet slowly by allowing some maturing securities to roll off without being replaced. That slightly tightens policy by removing the downward pressure on longer-term interest rates provided by the Fed’s bond purchases.

Just 19% of economists, however, said a rate cut would prompt officials to end the balance sheet runoff ahead of schedule. The process is due to wind up at the end of September.

In a final question, more than two-thirds of the economists said the strength of the U.S. dollar was not becoming a bigger factor in Fed rate decisions. The Fed’s own trade-weighted index of the dollar rose to a 17-year high on May 31 before falling back about 1.5%.

To contact the reporters on this story: Christopher Condon in Washington at ccondon4@bloomberg.net;Catarina Saraiva in Houston at asaraiva5@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Jeff Kearns

©2019 Bloomberg L.P.