Financial Times Europe - 31.07.2019

(Axel Boer) #1
Wednesday31 July 2019 ★ FINANCIAL TIMES 3

I N T E R N AT I O N A L


JA M E S P O L I T I— WASHINGTON
C O L BY S M I T H— NEW YORK
Federal Reserve policymakers are
meeting in Washington amid wide-
spread expectations that they will
decide to cut interest rates for the first
time since the financial crisis, and since
Jay Powell, pictured, began his tenure at
the helm of the US central bank.
Here are five things to watch today
when the Fed issues its statement and
Mr Powell holds his press conference.

The cut
The Fed will almost certainly deliver the
25 basis point cut in its main interest
rate that it has been eyeing for some
time, bringing it down to a target range
between 2 and 2.25 per cent. Some econ-
omists and investors had suggested that
the US central bank might aim for a big-
ger cut of 50bp out of the gates, but that
seems unlikely. Minutes from last
month’s Federal Open Market Commit-
tee meeting indicated that many Fed
officials saw a stronger case for “some-
what more accommodative policy” —
suggesting a more cautious first move.
Any other scenario — of a larger
cut, or none at all — would be a
huge surprise.
Michael Feroli, a US econo-
mist at JPMorgan, said one of
the reasons he thought the Fed
would move by 25bp was that the
economic outlook was not
dire enough to war-
rant a bigger cut. “In
past episodes the
Fed only initiated
an easing with a
50bp move when
there was a finan-

cial crisis or when the Fed was behind
the curve and the economy was already
showing signs of distress. Neither of
those conditions hold today.”

The guidance
Assuming a 25bp cut is sealed, the big-
gest question is to what extent Fed offi-
cials will signal their intent to continue
easing monetary policy in the coming
months. That guidance may not come in
the FOMC statement, which could con-
tinue to repeat that it will “act as appro-
priate to sustain the expansion”. But it
could well come in Mr Powell’s post-
meeting remarks.
The Fed chairman has beenstressing
many of the risks to the US outlook in
recent public appearances, but if he
reverts to emphasising the central
bank’s reliance on hard data, it may sig-
nal that the central bank is not con-
vinced yet of the need for a full cycle of
deeper cuts.
“We expect [Mr Powell] to preserve
optionality in his response, not commit-
ting the committee to specific actions,
though he will likely reiterate that a res-
olution of the various uncertainties
buffeting the outlook, with trade
policy being a key one, could
lessen downside risks and limit
the need for further easing”, Deut-
sche Bank’s US economists wrote
in a note last week. One point of
uncertainty is whether the Fed
will announce that it
intends to stop shrinking
its balance sheet this
month, instead of in
September, which
would solidify its
dovish stance.

The dissent
Mr Powell suffered the first dissent of
his tenure as Fed chair last month when
James Bullard, the president of the Saint
Louis Fed,voted against he decision tot
keep rates steady, arguing that a 25bp
cut had already been needed at the time.
To the extent that there is displeasure
with the Fed’s move today, it is likely to
come from the opposite side.
Dissents could come from Esther
George of the Kansas City Fed or Eric
Rosengren of the Boston Fed, whohave
suggested he threshold for monetaryt
easing has not been met yet.
Mr Powell could live with a few dis-
sents. But he will want to avoid a spirited
debate turning into persistently open
disagreement, which could be unset-
tling for the central bank at a time when
it is already facingharsh criticism romf
Donald Trump, US president.

The rationale
Mr Powell will have some explaining to

do. Although investors started betting
on an interest rate cut a few months ago,
many economists are not sure the data
justify monetary easing at this stage.
The Fed chairman and other officials
havelaid out the case or the rate cut inf
some detail heading into the meeting,
including a speech in Paris during which
Mr Powell discussed the “interconnect-
edness” of the US economy with the rest
of the world.
It is very likely that the Fed chairman
willstress weakness round the world,a
with the IMF cutting its global growth
forecast earlier this year, and how that
has factored in the decision.
Mr Powell will probably also place a
large emphasis on below-target infla-
tion and weakness in investment, which
have overshadowedconsumer strength.
The Fed chair’s ability to make a con-
vincing case for the rate cut will help to
fight any notion that the central bank is
simply caving in to Mr Trump’s persist-
ent requests for aggressive monetary
easing.

The reaction
The first verdict on Mr Powell’s big
move will come from markets, and the
bar to impress is high. Traders are pric-
ing in three more rate cuts over the next
year, after this week’s 25bp. Should the
Fed fail to signal clearly its willingness to
ease monetary policy in line with mar-
ket expectations, investors will be quick
to react,a lesson outgoing European
Central Bank president Mario Draghi
learnt last week when he under-
whelmed with scant details about when
and how aggressively the central bank
he helms will provide more stimulus.
Even a larger, more aggressive 50bp
point cutcould cause consternation. If
unaccompanied by a pledge for addi-
tional accommodation, investors who
believe the US economy needs more
than a one-and-done cut in order to
stave off a recession or revive inflation
will likely balk.
Robin Harding age 9p
See Markets

Powell pressed


from all sides


as Fed meets


Trump wants aggressive action while


markets price in three cuts in next year


R O B I N H A R D I N G— TOKYO

The Bank of Japan has kept monetary
policy on hold at its July meeting, but
signalled it will respond aggressively to
any economic weakness caused by
events abroad.

Japan’s central bank said it would main-
tain overnight interest rates atminus
0.1 per cent, continue buying govern-
ment bonds at a pace of ¥80tn a year
and keep a cap on 10-year bond yields at
about zero.
But it added a line to its statement
vowing to respond if developments
overseas start to drag Japan’s economy
down. “If the momentum towards our
price stability objective is at risk, then
without hesitation, we will take meas-
ures for further monetary easing,” said
Haruhiko Kuroda, BoJ governor.
The decision shows that the BoJ is in a
wait-and-see mode as it anticipates a
likely interest rate cut from the US Fed-
eral Reserve and possible further mone-
tary easing by the European Central
Bank.
Lower interest rates abroad could
lead to a rise in the yen as it becomes less
attractive for investors to hold dollars. A
stronger currency would hurt Japan’s
exports, already suffering this year from
a slowdown in China.
“We do not think policymakers had
the possibility of taking specific easing
action in mind when they decided to
add this sentence,” said Kiichi Mura-
shima, an economist at Citi in Tokyo.
“We believe the BoJ aimed to discour-
age potential yen appreciation by imp-
lying its firm determination to ease pol-
icy further in case the yen appreciates
sharply against the US dollar,” he said.
Mr Kuroda declined to set out what
form a further monetary easing could
take, given Japan’s central bank has
already conducted massive asset pur-
chases and pushed many interest rates
to zero or below.
Notebook age 8p

Monetary policy


apan centralJ


bank holds


rates but keeps


easing on cards


Trading places: investors want a signal on the Fed’s willingness to ease policy in line with expectations —Drew Angerer/Getty Images

JULY 31 2019 Section:World Time: 30/7/2019- 18:23 User:david.owen Page Name:WORLD2 USA, Part,Page,Edition:EUR, 3, 1


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