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Home > Economics > FOMC Preview: Insurance against a greater pace of economic deceleration

FOMC Preview: Insurance against a greater pace of economic deceleration

Jul. 29, 2019 by Joseph Brusuelas

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A sagging global economy dragged down by a trade war and a domestic manufacturing sector on the edge of contraction are sufficient risks to warrant a 25-basis-point-reduction in the federal funds rate to 2% to 2.25% percent when the Federal Open Market Committee concludes its policy meeting on Wednesday.

In addition, we expect the committee will end its balance sheet reduction program and reduce the interest paid on excess reserves by 25 basis points. Given the sharp differences of opinion among committee members on the efficacy of a rate cut now as opposed to reserving as much monetary firepower as possible for when the current business cycle ends, there will likely be at least one dissenting voice coming from Kansas City Federal Reserve President Esther George, Boston Fed President Eric Rosengren or FOMC Vice Chair for Supervision Randal Quarles.

Big week ahead for central banks

The Federal Reserve’s expected move comes amid a major week of pending policy decisions by global central banks including the Bank of Japan, the Bank of England and the Central Bank of Brazil, in addition to ongoing trade negotiations between the United States and China. Just as important, the July Manufacturing ISM report from the Institute of Supply Management will be published on Thursday and the July U.S. employment report will be released on Friday, setting up the week as the most important for policymakers, investors and corporate executives in some time. The Fed’s policy statement and the subsequent press conference with Fed Chair Jerome Powell will be refracted through a global economic prism that will elicit further questions about the direction of trade and monetary policy for the remainder of the week.

While we expect no change in the June forward guidance and for the Fed to retain the phrases “will closely monitor” and “will act as appropriate,” we think the committee will err on the side of caution in its post-meeting statement, noting weak fixed-business investment and a milder economic outlook. We also expect no change on the language describing inflation.

At the June meeting, Powell chose to signal a coming rate cute and was far move dovish than the Fed’s statement implied. During this week’s post-statement press conference, we expect to see a bit more disciplined Powell, given the sharp differences on the committee over a rate cut in July much less an additional cut in September. Our base case remains that the FOMC will cut rates twice this year by 25 basis points (in July and September) and we anticipate that Powell will accentuate growing global risks and the contraction in capital expenditures in his live comments to support the Fed’s policy decisions.

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Filed Under: Economics Tagged With: federal funds rate, Federal Reserve, FOMC, Joe Brusuelas, RSM

About Joseph Brusuelas

@JoeBrusuelas

Joe Brusuelas, “chief economist to the middle market,” is the preeminent voice championing issues and policies facing midsize companies in the United States and around the world. An award-winning economist, Brusuelas has more than 20 years’ experience analyzing U.S. monetary policy, labor markets, fiscal policy, international finance, economic indicators and the condition of the U.S. consumer.

A member of the Wall Street Journal’s forecasting panel, Brusuelas regularly briefs members of Congress and other senior officials regarding the impacts of federal policy on the middle market and the factors by which middle market executives make business decisions. He also frequently offers his insights on the U.S., Canadian and global economies in the financial media. In 2020, he was named one of the 100 most influential economists by Richtopia.

Before joining RSM in 2014, Brusuelas spent four years as a senior economist at Bloomberg L.P. and the Bloomberg Briefs newsletter group, where he co-founded the award-winning Bloomberg Economic Brief. Earlier in his career, he was a director at Moody's Analytics covering the U.S. and global economies for the Dismal Scientist website. He also served as chief economist at Merk Investments L.L.C. and chief U.S. economist at IDEAglobal.

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