What Would It Take for the Fed to Lower Rates? Very Bad News
In the face of White House pressure, Federal Reserve Vice Chair Clarida spells out the punk economy needed to loosen policy.
President Donald Trump and others are insisting that the Federal Reserve cut interest rates, and the central bank thus far has resisted.
What would it take to get the Fed to change its mind? Something that Trump and his confreres wouldn’t like.
A bad economic situation that the president, up for reelection in 2020, would find politically unpalatable. That’s the scenario sketched out by Fed Vice Chair Richard Clarida, in an appearance at the Economic Club of New York Thursday.
Currently, the futures market puts 50% odds on the funds rate being a half-percentage point lower by year-end. Word from the Federal Open Market Committee (FOMC), the Fed’s policymaking arm, suggests otherwise. According to the FOMC’s recently released minutes, it expects rates to stay unchanged “for some time,” as the economy expands and inflation is muted.
Clarida doubled down on that assessment. He listed two conditions for the FOMC to lower rates: a “persistent shortfall in inflation” below the Fed’s 2% target, and “global economic and financial developments present a material downside risk to our baseline outlook.” In other words, a recession has erupted or at least is looming.
Fed Chairman Jerome Powell has long said that any change in policy will be “data driven.” Trump, of course, surely wants lower rates to be sure that the economy is humming when voters go to the polls in November 2020.
For the moment, though, the economic situation doesn’t lend itself to any action. Inflation is reasonably near 2%, although still below that desired level. And most economic indicators in the US remain strong. The first quarter economic growth number was just reduced, but only to 3.1% from 3.2%.
“Midway through the second quarter of 2019, the US economy is in a good place,” Clarida told the Economic Club. “By most estimates, fiscal policy played an important role in boosting growth in 2018, and I expect that fiscal policies will continue to support growth in 2019.”
Clarida and Powell, both Trump appointees to the Fed, backed off an earlier campaign to keep raising short-term rates. And the plan right now is to keep the benchmark federal funds rate steady, in a range from 2.25% to 2.5%.
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