Fed's Powell affirms rate cut view; others see U.S. economy humming

[July 12, 2019]  By Howard Schneider and Ann Saphir

ATLANTA/VICTOR, Idaho (Reuters) - As Federal Reserve Chair Jerome Powell kept the focus Thursday on global risks that could trigger a Fed rate cut in coming weeks, his colleagues from regional Fed districts painted a rosier picture of continued U.S. economic growth and a solid business outlook.

The contrasting remarks show the dilemma the Fed faces as it heads toward an end-of-month monetary policy meeting now broadly expected to end with a rate reduction.

On one hand - emphasized by Powell in Congressional hearings Wednesday and Thursday and seconded by the influential chief of the New York Fed and Fed Governor Lael Brainard -- global trade and economic risks have put a dent in investment, inflation is well below the Fed's 2% target, and the U.S. expansion may need a shot in the arm.

But as they polled businesses in their districts, Atlanta Federal Reserve Bank President Raphael Bostic and Richmond Federal Reserve Bank President Thomas Barkin saw an economy still humming, and no clear need for the Fed to ease monetary policy.

"I am not seeing the storm clouds actually generate a storm yet," said Bostic, who described himself as skeptical of the need to cut interest rates right now. "With very few exceptions businesses are telling me the economy is performing as strong as it was. They are not seeing weaknesses in consumer engagement. And they are not materially changing their plans."

"I've been out in the last couple weeks and I'm talking to business people," Barkin said on Thursday. "They are not yet leaning back...They are not cutting jobs, They are not cutting investments that have already been underway. But they are cautious...They haven't stopped, they've just slowed."

More detail about on-the-ground business sentiment may come next week when the Fed releases its latest Beige Book compendium of anecdotal information from the 12 Fed districts.

Powell has pointed to a number of national surveys as evidence business confidence took a hit recently, particularly in May after President Donald Trump threatened to impose tariffs on Mexican imports unless his demands about tougher immigration enforcement were met.

The tariffs were not levied, but "it was a bit of a confidence shock, Powell told the Senate Banking Committee.

In Albany, New York Thursday, New York Fed President John Williams, added his voice in support of a rate cut, citing uncertainties around trade and global growth and soft inflation. "The arguments, for adding policy accommodation have strengthened over time."

Brainard, in a separate appearance in Scranton, Pennsylvania, piled on. "Taking into account the downside risks at a time when inflation is on the soft side would argue for softening the expected path of monetary policy according to basic principles of risk management," she told a community banking group.

Federal Reserve Board Chairman Jerome Powell testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on the "Semiannual Monetary Policy Report to Congress" on Capitol Hill in Washington DC, U.S., July 11, 2019. REUTERS/Leah Millis

Neither Barkin nor Bostic have a vote this year on the Fed's rate-setting committee. But they will participate in the debate when the Fed meets in three weeks in a session widely expected to reduce the Fed's overnight target interest rate by at least a quarter of a percentage point.

Investors expect that cut with near 100% certainty.

Powell, in appearances on Capitol Hill this week, bolstered expectations such a cut is coming, and focused on the need to protect the United States against fallout from a weak global economy.

Neither Barkin nor Bostic ruled out supporting a rate cut, which, according to minutes of the Fed's June meeting, has drawn support for a variety of different reasons -- both the global tensions Powell has focused upon, as well as weak inflation and a sense that the Fed had unintentionally set policy too tight with its four interest rate increases last year.

At least a couple regional Fed bank presidents do support a rate cut, including St. Louis Fed Bank President James Bullard, and Minneapolis Fed President Neel Kashkari who on Thursday said he is advocating the "stronger medicine" of a half-percent rate cut. Both men say a rate cut is needed to boost inflation expectations.

But other regional bank presidents have in recent days said they were struggling to justify lower rates at a time when unemployment is near a historic low, at 3.7%, and job growth continues apace.

Bostic said that even recent weak inflation data may not be as worrisome as it might seem.

With the Fed's current preferred measure of inflation running at 1.6%, below the 2% target, some policymakers argue the central bank needs to do more or risk losing public trust that it takes the target seriously.

"If the public comes to believe that a persistent downside miss to the 2% goal means the FOMC is not committed to that goal, then there is a problem," Bostic said.

But he added that his analysis of inflation expectations, based on surveys of professional forecasters and business executives, left him unconvinced that expectations are slipping. In addition, less "noisy" measures of actual inflation, which strip out the most volatile terms, indicate "that right now we are very close to our 2% price stability mandate."

(Reporting by Howard Schneider; Additional reporting by Trevor Hunnicutt; editing by Diane Craft)

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