The Federal Reserve has delivered a boost to the economy this year not only with interest-rate cuts but also because it shifted away from its earlier view that it would need to raise rates in 2019, two Fed policymakers said.
But despite ongoing headwinds, including weaker global growth, ongoing trade tensions and geopolitical risks like a possibly messy British exit from the European Union, only one policymaker - St. Louis Fed President James Bullard - suggested that further policy easing is in the cards.
Bullard, who has focused on the fact that some short-term Treasury debt yields have risen above long-term bond yields in what is sometimes seen as a sign of coming recession, noted that for now the bond "yield curve" looks more normal.
But that is "likely because markets are anticipating future policy moves" by the Fed, Bullard told the Effingham County Chamber of Commerce.
San Francisco Fed President Mary Daly, who spoke at a separate event a few hours later in Salem, Oregon, acknowledged that the Fed's policy easing has only "partially" offset the various drags on the economy. But she gave no hint about whether she will support more rate cuts to deliver a fuller offset.
"When the headwinds blow, they have real effects – that’s an aggregate demand suppression," she said, explaining that she supported the Fed's cuts so far this year. "We have lower aggregate demand momentum than we would have in the absence of these headwinds, and monetary policy can and should offset that."
When interest rates fall, households can refinance their mortgages, she said, and use the savings to buy things they otherwise might not purchase.
Such consumer spending can "partially offset" slowdowns in other parts of the economy where businesses "hunker down" trade and other uncertainty, she said.
The Fed lowered its target rate to a range of between 1.75% and 2.00% at its last meeting, its second quarter-point rate cut this year. Top officials say they will now make decisions on a "meeting by meeting" basis, with no clear commitment to further reductions.
Daly does not have a vote on policy this year. Bullard does, and last week used it to dissent because he felt a bigger, half-point rate cut was warranted.
Investments in contracts tied to the Fed's target policy rate show investors expect one more quarter-point reduction by the end of the year.
While the Fed has cut short-term interest rates a half a percentage point since July, its overall shift in tone and the removal of previously expected rate hikes is one reason the economy has not slowed more than it has already, Daly said.
In fact, Bullard said, they have caused longer-term bond rates to fall by more than twice that amount.
Still, he added, the Fed "may choose to provide additional accommodation going forward" as global trade and other risks threaten to cause the United States to slow more than expected this year, and undercut the Fed's ability to achieve its 2% inflation target.
"Recent developments in global trade negotiations suggest that it will be difficult to reach a stable global trade regime" anytime soon, Bullard said. "This is likely chilling global investment and feeding into slower global growth."
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