The last words of the Fed and the Beige Book stays bland

Four Federal Reserve officials offered their views on the US economy and the possibility of a third rate cut this week just before the blackout period begins on Saturday ahead of the FOMC meeting on October 29-30.

Robert Kaplan, Dallas Fed President and a non-voter on the FOMC this year said that he had been a strong supporter of the two previous cuts but was amenable to the idea that the central bank might take time to assess the results of its change in policy.  “I’m going into the meeting open-minded, but I’m agnostic at this point whether we should be taking action at the October meeting, he said to reporters after a discussion in Washington.

Neel Kashkari, the Minneapolis Fed President commented in an interview with Reuters in New York that he is in favor of further rates cuts, noting that interest rate policy should be “somewhat accommodative.”  Mr. Kashkari does not vote this year.

The current fed funds target range of 1.75%-2.00% is just above the 1.748% yield (Friday 3:10 PM EDT) of the 10-year Treasury which could be viewed as slightly restrictive. The fed funds effective rate of 1.850% is within the target range and would make policy neutral.  Treasury yields have risen sharply this month with the 10-year gaining 22 basis points and the 2-year adding 18 points to 1.576%.

Reuters

Vice Chairman of the Federal Reserve Richard Clarida said that “The US economy is in a good place and the baseline outlook is favorable,” in a speech in Boston on Friday. The Fed will “act as appropriate” to sustain economic growth, though business investment has diminished and the slowing global expansion has risks for the US economy. He also stated that “Looking ahead, monetary policy is not on a preset course…”. Mr. Clarida is a voting member of the FOMC this year.

 In these remarks he mirrored the comments of Fed Chairman Jerome Powell after the last FOMC meeting when he stressed the trade and global threats to the long-running US expansion.

The leader of the Kansas City Federal Reserve, Esther George, said that “The ability of the Federal Reserve to offset any unintended effects related to financial stability at this stage of the business cycle seem limited,” in  a speech at an energy conference in Denver.  She observed that cutting rates now to insure against global risks could lead to overheating a danger with the elevated debt levels in the economy.  Ms George voted against the 0.25% cut at the last two FOMC meetings.  

The Fed’s Beige Book assessment of the US economy released on Wednesday mirrored the relatively positive analysis of most of the Fed governors. This anecdotal collection of economic observations prepared for each FOMC meeting said that the US expanded at a “slight to modest pace” through early October, a slight downgrade from the September judgement.  Manufacturing executives continued to be concerned “that persistent trade tensions and slower global growth weighed on activity.”

The Fed Funds futures rate the chance of a 25 basis point cut on the 30^th at 89.3%. The odds have risen about 15% over the last two weeks.

CME Group

It is possible that by the governors will have a clearer view of the global and US economic pictures when they meet on the 29^th-30^th.  Two of the world’s long running problems, the US China trade war and the British exit from the European Union, may be on their way to settlement. 

In Washington the Trump administration agreed to what it is calling a phase one trade deal with China, withdrawing new tariffs in exchange for agriculture purchases and partial agreements on intellectual property and financial services issues.  Mr. Trump said he hoped the deal could be signed by himself and President Xi of China at the Asia Pacific Economic Cooperation meeting in Chile next month.

In the UK Boris Johnson’s modified Brexit deal will be voted on in Parliament on Saturday.  The Financial Times tweeted on Friday afternoon that in an intensive lobbying effort the Tory Prime Minister had secured enough members for a two vote majority in the Commons.