Jul 11, 2019

A Fed fight may be brewing over interest rate cuts

Federal Reserve Chairman Jerome Powell speaks to an aide. Photo: Zach Gibson/Getty Images

The market got the signal loud and clear from Fed Chair Jerome Powell yesterday — an interest rate cut is coming in July — but that rate cut may push forward tensions within the central bank.

What's happening: At June's meeting, the Fed delivered the first non-unanimous rate decision of Powell's tenure, and judging by the minutes of the FOMC meeting released Wednesday, there is disagreement among members about whether a cut next month is warranted.

  • Several FOMC members "didn't see a strong rate-cut case" and a few saw a rate cut as a risk that could create "financial imbalances" in the economy, the minutes showed.

The intrigue: Bank of America-Merrill Lynch research analysts say they're now anticipating 3 more rate cuts this year, 1 at each of the Fed's next 3 meetings. But they're also expecting some pushback from members who have been on board with the pivot to "patience," but may not be as amenable to cuts.

  • "The FOMC is not in agreement," BAML's research team said in a Wednesday note to clients. "We will likely see a number of hawkish dissents at the upcoming meeting (potentially as many as three)."

Between the lines: Powell is well respected by the market and his colleagues on the Fed, but he does not hold the sway of decorated economists like his predecessors Janet Yellen, Ben Bernanke and Alan Greenspan.

  • So far, St. Louis Fed President James Bullard has been the only voting member of the Fed's rate-setting committee to formally break with Powell. But if other, more influential, members of the committee begin to oppose him, it may foment larger rebellion.

The bottom line: The Fed's most recent dot plot showed a growing schism among FOMC voters about whether to hold rates steady or cut. For now, the expectation is that Powell's vision will win out, but he looks to be losing support, and a few dissents at July's meeting may be just the beginning.

Go deeper: The case for a Fed rate cut

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Alan Greenspan backs a Fed rate cut

Alan Greenspan. Photo: Steven Ferdman/Getty Images

Former Fed Chair Alan Greenspan endorsed the central bank's expected rate cut at this month's FOMC meeting during an interview with Bloomberg TV on Wednesday.

Why it matters: Current Fed Chair Jerome Powell has shown admiration for Greenspan and getting his stamp of approval likely means a rate cut for July is a lock. Powell also could feel emboldened to adopt an even more dovish stance, acquiescing to the market's expectation of 75 basis points of cuts within the next year.

Go deeperArrowJul 25, 2019

Investors are betting on multiple Fed rate cuts by year-end

Data: CME Group; Chart: Andrew Witherspoon/Axios

Despite Fed chair Jay Powell's "hawkish" rate cut last month, expectations for more cuts from the Fed are growing, thanks in large part to President Trump and the trade war.

What's happening: Investors are now pricing in a 0% chance the Fed doesn't move at its next meeting in September and a nearly 50% likelihood of 3 rate cuts by year-end.

Go deeperArrowAug 7, 2019

Jay Powell's constraints

Illustration: Sarah Grillo/Axios

Jay Powell did his best impression this week of a Fed chair making his own data-driven decisions about where he should set short-term interest rates. The reality, however, is that the markets and the president are giving him very little choice.

Driving the news: Powell cut interest rates on Wednesday — the first time the Fed has done so in over a decade. In doing so, he effectively fulfilled a prophecy that the fixed-income markets (and even the stock market) had been making for all of 2019. They saw the rate cut coming long before the Fed was willing to admit it, and they were right all along.

Go deeperArrowAug 4, 2019