After the Fed’s Second Rate Cut, Hints of Another to Come

Days after the Federal Reserve lowered borrowing costs for a second time since July, a top Fed official signaled that further interest rate cuts could come before year-end.

Vice Chairman Richard Clarida, asked in an interview whether markets had seen the final reduction in borrowing costs for 2019, chose to emphasize that the Fed’s September economic projections, released on Wednesday, have seven officials expecting a third rate cut before the end of the year.

“That’s not a commitment; we didn’t vote on it,” he said n an interview on CNBC.

The Fed wants to keep its options open, and Mr. Clarida, the first member of the Fed’s board of governors to speak since Chair Jerome H. Powell’s post-meeting news conference on Wednesday, made that point clear, saying earlier in the interview that “going into October and beyond, we’ll go one meeting at a time.”

He emphasized that the Fed is contending with threats to the economic outlook arising from slowing global growth, President Trump’s ongoing trade war and stubbornly weak inflation. But he also highlighted that the labor market and consumer spending are strong.

Against that polarized backdrop, the Fed has become increasingly divided over how to carry out monetary policy. Three officials disagreed with the decision to cut interest rates by a quarter-point this week, the most dissenters since 2016. Two thought the committee should have held steady, while James Bullard, president of Federal Reserve Bank of St. Louis, said it should have cut rates by more.

The Fed is dealing with a stark contrast: real-time data look strong but the economic outlook remains fraught. That is prompting the central bank to make its decisions meeting by meeting, as both Mr. Clarida and Mr. Powell have said.

But Mr. Clarida’s decision to emphasize the set of officials who anticipate an additional cut, paired with Mr. Powell’s repeated emphasis during his news conference this week on how much the board’s thinking has evolved since last year, when it was raising rates, seems to suggest that the momentum is still headed toward easier monetary policy.

“The main takeaway,” Mr. Powell said this week, “is that this is a committee that has shifted its policy stance repeatedly, consistently through the course of the year, to support economic activity as it has felt that it’s appropriate.”

What qualifies as “appropriate” is increasingly contested. Mr. Bullard, who wanted a more aggressive rate cut this month, released a statement Friday explaining his rationale.

“There are signs that U.S. economic growth is expected to slow in the near horizon,” he wrote. “Trade policy uncertainty remains elevated, U.S. manufacturing already appears in recession and many estimates of recession probabilities have risen from low to moderate levels.”

His colleagues Esther George, from the Federal Reserve Bank of Kansas City, and Eric Rosengren, from the Federal Reserve Bank of Boston, also voted against the September move but in favor of leaving rates unchanged. They had dissented with the July rate cut as well.

“Additional monetary stimulus is not needed for an economy where labor markets are already tight,” Mr. Rosengren said in a statement about his rationale. He added that cutting rates “risks further inflating the prices of risky assets and encouraging households and firms to take on too much leverage.”

He said that “risks clearly exist related to trade and geopolitical concerns,” but “lowering rates to address uncertainty is not costless.”

Yet Mr. Clarida said the committee as a whole does not see financial risks as elevated. And he used his interview to push back on one common rationale for holding off on further cuts: the idea that it makes sense to save ammunition for the future, given that the Fed’s policy rate is already low by historical standards.

Instead, he said, “it’s important to act when you can, responsibly and preemptively, to try to stay away from that bad situation.”

While Mr. Trump has been pushing the Fed to lower rates to zero or below, arguing that doing so would make the United States more competitive with economies in Europe and Asia, Mr. Clarida suggested on Friday that negative rates are not on the table. Both Mr. Clarida and Mr. Powell have noted that negative rates were considered and rejected during the Great Recession.

And Mr. Clarida added that the United States economy does not need to go as far as other countries, saying their negative rates “are a symptom of very, very slow growth.” While the outlook shows cracks, the U.S. economy remains strong.

“The U.S. economy is a resilient economy; we have really been the star pupil in the class of the global economy,” he said.

Mr. Clarida also addressed the cash crunch that materialized in short-term lending markets this week, saying that the Fed had acted “decisively” to address it. Market strategists say the problem may have arisen because the central bank has allowed too much of its portfolio of securities, acquired in the wake of the financial crisis, to mature without reinvestment. The Fed vice chair said that “organic” growth of the central bank’s bond holdings will be up for discussion at its October meeting.

But he was careful to emphasize that organic growth is not the same as quantitative easing, or Q.E., the Fed’s crisis-era policy of buying massive quantities of bonds to stoke economic growth.

“Let me just say,” he said, “it would not be Q.E.”

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