Off The Wire
Fedspeak in three voices, from recession to bubbles to 'in a good place'
WASHINGTON (Reuters) - After delivering a split-decision rate cut earlier this week, U.S. Federal Reserve officials put their divisions over the state of the economy and what should be done about it on full display Friday with warnings of a slowdown and financial risks bookending talk of how well things are going.
Central bankers may often be called on to speak with one voice, but the Fed now has three - those ready to reduce rates even lower to ward off economic risks, those ready to stand pat and watch the data for now, and those warning that the Fed may already be fueling a credit bubble.
“The economy is in a good place,” Fed Vice Chair Richard Clarida said in a CNBC interview, noting that while there are risks, there is also a “virtuous circle” under way of job gains, wage gains, and increased spending among households.
Consumption accounts for nearly 70% of the U.S. economy, and “I cannot think of a time in aggregate when the consumer has been in better shape,” Clarida said.
That may be the case, but other Fed officials said the emphasis needs to be elsewhere - though they disagreed over just where.
President Donald Trump has demanded deep interest rate cuts and sees the logic as simple: do it to make an already strong economy even stronger, with little or no risk.
But even those who agree with lower rates see the situation differently, with St. Louis Fed President James Bullard arguing that the Fed should have cut deeper this week to ward off weakness that includes a manufacturing sector that “already appears to be in recession.”
Bullard dissented against this week’s Fed decision because he wanted a larger, half a percentage point rate reduction, and in a written statement said he feels overall economic growth may also slow “in the near horizon.”
The Fed by a 7-3 vote reduced its target overnight policy rate by a quarter of a percentage point on Wednesday, to a level of between 1.75% and 2.0%, to offset slowing global growth and risks associated with Trump’s trade battles with China.
It was the second Fed rate reduction this year.
“It is prudent risk management, in my view, to cut the policy rate aggressively now and then later increase it should the downside risks not materialize,” Bullard wrote. “Many estimates of recession probabilities have risen from low to moderate levels.”
Recent data has been more mixed, with some positive surprises, and Boston Federal Reserve President Eric Rosengren said the Fed should beware of feeding credit when the economy is healthy.
He also dissented last week, but from the opposite end of the spectrum as Bullard, arguing for no rate cut at all.
In a challenge to Trump’s view that rate cuts are costless to the economy, Rosengren said current Fed policy is now actively nudging people to borrow and “risks further inflating the prices of risky assets and encouraging households and firms to take on too much leverage.”
With the unemployment rate near its record low, “additional monetary stimulus is not needed for an economy where labor markets are already tight,” Rosengren wrote.
This week’s meeting marked the first with three dissents since September 2016, when Rosengren joined two others in arguing for a rate increase.
Officials’ projections issued last week show the 17 Fed members split into roughly equal groups, with seven projecting one more rate reduction this year, five seeing no change, and five expecting that a rate hike will be appropriate by the end of the year.
The projections are issued anonymously, so it is unclear where the more influential officials, and most importantly Fed Chair Jerome Powell and Clarida, fit in that mix.
In his remarks Clarida hewed close to the language Powell used in a Wednesday press conference, saying the Fed would “act as appropriate,” and watching incoming economic data for decision that will be made “meeting by meeting.”
Reporting by Howard Schneider; Editing by Nick Zieminski and Andrea Ricci