Federal Reserve officials signaled that they were ready to cut interest rates by a quarter of a percentage point at their next meeting and pointed to the potential for further reductions as they worried about a slowdown in global growth and an increase trade uncertainty and a decline in inflation.
Officials are not prepared for courageous action by cutting by half a point, as analysts and traders have speculated in recent days.
A bigger step seems unlikely for the time being, as the latest economic developments have not signaled an immediate downturn, according to official figures.
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Fed Chairman Jerome Powell set the stage for the cut last week as he expressed congressional concern about global growth and the risk of a prolonged decline in inflation caused by the Fed's 2% target , These developments reinforced the argument for a somewhat simpler political stance, he said.
The conclusion is that, subject to unexpected economic developments until the meeting of July 30 to 31
Market expectations for a cut of half a point in the Fed spiked on Thursday afternoon after New York Fed President John Williams delivered a speech on 20 years of theory and practice suggesting more aggressive and proactive behavior indicated when the economy is justified weakens at a time when interest rates are already low.
Mr. Williams's words are in part of great importance in the markets because he is Deputy Chairman of the Federal Open Market Committee, which sets the interest rates. After markets had expected a larger rate cut, the New York Fed made a rare clarification that the speech should not provide a specific signal for short-term policy measures.
"This was an academic speech over 20 years of research. The upcoming FOMC meeting was not about possible policy action, "a spokesman for the New York Fed said Thursday on reporters' questions.
Mr. Williams, a leading academic thinker, highlighted points he had previously made public. The context of his remarks – he spoke shortly before the start of the Fed's usual pre-ballot phase that begins on Saturday – triggered an unintended market reaction.
"We've never seen anything like this and honestly we're not sure what they thought," said Neil Dutta, chief economics officer at Renaissance Macro Research LLC, Friday morning in a customer announcement. "Of course, the market would stick to a speech like this – given the center of gravity and the timing – just before the confabulation in July."
President Trump, who has regularly called for several rate cuts, said on Friday in two tweets that he preferred Mr. Williams's "first statement much better than his second". He reiterated his call to the Fed to aggressively lower interest rates: "Don't blow it!"
Fed officials will need to consider further developments in the coming years Ten days, including the European Central Bank's policy decision next Thursday and reports on US economic growth and inflation in the second quarter.
Some officials who advocate lower interest rates believe that the Fed does not have to take big steps at this time. James Bullard, president of the Fed of St. Louis, who opposed June's decision to keep interest rates low by advocating a rate cut, said in an interview that he would hear arguments for a half-point cut, he added However, I simply do not believe that the situation really requires such an aggressive move. "
Dallas Fed President Robert Kaplan said in an interview on Tuesday that he could support a" tactical "rate cut due to recent declines in long-term bond yields, but that such a move would be" modest, restrained [and] " should. He said he was worried about the potential to foment asset price bubbles through unnecessary incentives in 1995 and 1998, when the Fed closed "insurance policies" by lowering interest rates as the economy was still healthy. In both cases, Fed officials initiated a series of three rate cuts at quarter-year intervals within a few months.
If the Fed officials now draw on this book, they would disappoint investors they bet on a larger half cut, but officials would still be willing to allow extra cuts.
Ethan Harris, head of the global economy at Bank of America, Merrill Lynch, said that a cut of half a point and the broader issues that Mr Williams addressed on Thursday are more relevant to a situation where the economy is clearly shrinking ,
And awe-inspiring approach is the wrong tool for the particular problem, "said Harris. "It's not for you if you're facing a slowdown or disappointment in achieving your inflation target."
The arguments for a rate cut began in May following an escalation in trading pressures by Mr. Trump, first with China and later with Mexico. Surveys showed that business sentiment was subdued, leading to fears of a greater decline in investment. "It was a little confidence shock," Powell said last week.
At the Fed meeting in June, eight out of 17 officials predicted a cut in policy rates this year, with seven out of eight expecting their prime rate to be half-point lower toward the end of the year. The interest rate is currently between 2.25% and 2.5%.
A larger cohort of 14 officials said they saw rising risks for weaker growth than expected, largely since the Fed began its last loan round in 2012 to boost economic growth.
Lewis Alexander, chief US economist at Nomura Securities, said that, given the officials' disagreement over whether and how much it would be worthwhile to reach agreement on a one-quarter-point reduction as half a point. "If you signal, a stronger consensus that sends a clearer message is beneficial."
Communicating the rationale for a larger cut could be difficult, as the background is relatively solid economic data, said William English, a former senior economist at the Fed, who now teaches at Yale University. He said it would be better to cut interest rates in smaller increments and eliminate the possibility of further moves at a later date.
Other analysts said overseas economic weakness will eventually expose the US corporate sector to a greater slowdown that could affect domestic attitudes, investment and spending that justifies Fed bias.
"A strong political response is needed to halt the recent sharp decline in economic momentum," Morgan Stanley's economists wrote in a report calling for a cut of half a point last week.
A rate cut is also likely to force debate over whether the Fed should reduce the $ 3.8 trillion outflow of its asset portfolio.
Fed officials announced in March that the reduction of their Treasury holdings would end in September. But Mr. Powell has also said that they do not want the outflow – a form of eliminating economic stimulus – to be in conflict with their interest rate policy, the primary way in which they intend to provide or remove STI.
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