Is the Fed softening on a rate cut?

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A nod to “trade negotiations and other matters” in Federal Reserve Board Chair Jerome Powell’s opening remarks to the monetary policy conference at the Chicago Fed, suggests, if needed, he would be willing to lower interest rates.

“We do not know how or when these issues will be resolved,” Powell told the conference, according to prepared text released by the Fed. “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective.”

Mickey Levy, chief economist U.S., Americas and Asia at Berenberg Capital Markets, said, “Powell simply implied that Fed is keeping up with trade negotiation details and will adjust monetary policy accordingly.”

While Powell addressed the trade situation, and noted the Fed is paying attention, “I do not think he was sending a dovish message given his conclusion about balancing a strong labor market and a symmetric stance on inflation around 2%,” said Charles Self, chief investment officer at iSectors. “More importantly, it seems that he thinks that the trade situation is a bigger risk than a slowing economy. We at iSectors continue to feel that the economy is slowing faster than the rate the consensus and the Fed believe.”

Self also found it “interesting” that Powell compared the current economy with the conditions in 1999. “It shows that the Fed is aware of the risks given the late nature of this cycle. We feel that with more soft economic information released in coming months, the fed funds futures expectation that 50 basis points of cuts will not only take place but may understate the amount of easing that the Fed may implement this year.”

Earlier, Chicago Fed President Charles Evans said in a televised interview, “I can see being more aggressive,” but declining Treasury yields don’t “necessarily mean the U.S. economy is weakening.”

When asked why the markets are pricing in two rate cuts this year and the Fed sees none, Evans replied, “At face value, it suggests the market sees something that I haven’t yet seen in the national data.”

And, he added, “We have to be paying attention to market signals where they seem to be seeing some things we’re not seeing as quickly.”

In other comments at the conference, Powell said, “the proximity of interest rates to the [effective lower bound] has become the preeminent monetary policy challenge of our time, tainting all manner of issues with ELB risk and imbuing many old challenges with greater significance.”

If rates were higher, he suggested, “around 4% or 5%, a low-side surprise of a few tenths on inflation did not raise the specter of the ELB. But the world has changed.”

With inflation low, a “low-side surprise, if it were to persist, would bring us uncomfortably closer to the ELB. My FOMC colleagues and I must—and do—take seriously the risk that inflation shortfalls that persist even in a robust economy could precipitate a difficult-to-arrest downward drift in inflation expectations.”

In addition, fears of hitting ELB affect “transparency and accountability,” he said. When rates neared zero, the Fed needed to try “new, untested tools,” where “their efficacy, costs, and risks remain less well understood than the traditional approaches to central banking.”

The FOMC remains “committed to explaining why the use of these tools in the wake of the crisis was a prudent and effective approach to pursuing our congressional mandate and why tools like these are likely to be needed again.”

The Summary of Economic Projections’ dot plot, Powell said, offers an idea of what the Fed expects “if things go as expected.” However, he cautioned, “we have been living in times characterized by large, frequent, unexpected changes in the underlying structure of the economy.”

As such, he suggested, it may be “more important” to tell “how the FOMC will react to unexpected economic developments. In times of high uncertainty, the median dot might best be thought of as the least unlikely outcome.”

Factory orders
Factory orders fell 0.8% in April, while March orders were revised down to a 1.3% gain from the previously reported 1.9% gain, the Commerce Department said.

Economists polled by IFR Markets expected a 1.0% decline.

Shipments dropped 0.5%, its biggest slide since April 2017.

New York City conditions
New York economic conditions slumped in May, with the current conditions index dropping to a two-year low of 48.6, after hitting a 12-plus year high of 77.3 in April, the Institute for Supply Management-New York’s Report on Business index, released Tuesday, indicated.

This index hadn’t shown contraction since September 2017, when it was at 49.7, ISM said. The future outlook index slid to 56.3 in May from a seven-month high of 77.8 in April.

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Monetary policy Jerome Powell Charles Evans Federal Reserve Federal Reserve Bank of Chicago FOMC