Economic Outlook - June 2019
Dr. Alan S. Blinder is a cofounder and Vice Chairman of Promontory Interfinancial Network. He is also the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University.
Sometimes the Federal Open Market Committee (FOMC) actually gets to split the baby. Such was the case this week.
A number of Fed watchers, not to mention President Trump, had worked themselves up into a lather, claiming that it was urgent for the Fed to cut interest rates immediately—maybe even by 50 basis points. But most observers, including myself, saw far more uncertainty (e.g., where will the trade war go?) than urgency (e.g., unemployment is below 4%, and the economy is growing). We expected the FOMC to stand pat.
And that’s just what it did, while adjusting the words in its statement to indicate more sympathy for cutting rates. In particular, noting that “uncertainties about [the] outlook have increased” since its last meeting, the FOMC dropped its famous “will be patient” language, replacing it with greater concern about economic weakness. It assured markets (and the White House?) that it “will act as appropriate to sustain the expansion.”
Here, briefly, is why Mr. Powell & Co. were right to remain patient, even if they dropped the word. First, the Fed lacks any instruments it could aim at today’s main macroeconomic worry: damage to international trade. Lowering interest rates would not ameliorate the supply-side disruptions caused by trade wars. Second, a June rate cut would have made it appear that the Fed was caving to Trumpian threats, which would set a terrible precedent.
Initially at least, both stock and bond markets applauded the Fed’s “split the baby” decision by rising. They got it right, too.
So where are we now?
In the old days, we would have said that the Fed is now “biased toward easing.” No rate cuts for now, but the Committee is focused on whether or not to cut them down the road—perhaps not very far down the road. One voting FOMC member, the St. Louis Fed’s James Bullard, even dissented Wednesday in favor of an immediate 25-basis-point rate cut. (Dissents like that are often harbingers of things to come.) And the famous “dot plot” now shows the Committee evenly split between those who foresee no rate changes this year and those who see one or (more likely) two cuts. It’s a coin flip—which is a big change from the recent past.