Did slowing Chinese growth just ensure a July rate cut?

Reading the press following Federal Reserve Chairman Powell’s testimony to the House Financial Services committee last Wednesday, one would have been convinced that the Federal Reserve was going to cut rates by the end of July. It was largely portrayed as being as certain as death and taxes.

And while the odds are better than not that the Fed will cut rates by the end of July, especially given the subsequent weak GDP report from China, there was an irrational level of certainty based on what was known at the time. Despite being less than three weeks away, much can happen between now and the Federal Open Market Committee (FOMC) meeting, and it already has. But let’s start with the key points from Chairman Powell’s testimony to the House Financial Services Committee. 

Powell’s prepared remarks began, “The economy performed reasonably well through the first half of 2019…” He repeatedly emphasized his commitment to keeping the economy performing well. He was focused on maintaining the current level of economic performance. That bodes well for a rate cut given his citing of “cross-currents” including domestic trade policy uncertainty and slowing economic growth. 

The second sentence of his prepared statement began, “Inflation has been running below the Federal Open Market Committee’s (FOMC)…2 percent objective…” With inflation leading up to the testimony running well below the Fed’s target, this seemed to indicate strong support for a rate cut in the near future. 

Then it got very interesting. Subsequent to the testimony, the latest inflation reading excluding food and energy came in much stronger than expected. While the factors driving the surprise increase, including health care, are not expected to propel core upward inflation at the same pace going forward, it certainly should give pause to those betting on 100 percent certainty of a July cut. Conversely, one of the crosscurrents Powell mentioned as a concern, global growth, subsequently reared its head further with China reporting slowing GDP growth.

Also of interest, while pundits were practically guaranteeing a rate cut, Atlanta Federal Reserve Bank President Raphael Bostic presented a rosier economic picture less supportive of a rate cut, saying, “I am not seeing the storm clouds actually to generate a storm yet.” He went on to say, “With very few exceptions businesses are telling me the economy is performing as strong as it was.  They are not seeing weakness in consumer engagements.  And they are not materially changing their plans.” This does not sound like a man viewing a rate cut as a necessity and certainty. 

Richmond Federal Reserve Bank President Thomas Barkin also presented a more optimistic picture than Powell. Barkin stated, “I’ve been out in the last couple weeks and I’m talking to business people…They are not yet leaning back…they are not cutting jobs, they are not cutting investments that have already been underway.”  

There are certainly some within the Fed with views more in line with Chairman Powell’s. New York’s Federal Reserve Bank President John Williams stated, “The arguments, for adding policy accommodation have strengthened over time.” Chicago Federal Reserve Bank President Charles Evans and Minneapolis Federal Reserve Bank President both went so far as to call for a 50-basis point cut in rates. 

While an eventual rate cut is a certainty, the timing is not, just as we know a recession is a certainty but not when it will strike. In the absence of certain knowledge of when either will happen, it is prudent for investors not to assign an irrationally high degree of probability to either occurrence.

To do otherwise would certainly expose investors to an unnecessarily one-sided bet and level of risk during a period of heightened uncertainty. Who knows, we may even get lucky and get a surprised trade deal with China between now and the end of July.  We can hope, can’t we? 

Chris Macke is the author of “Solutionomics.” He is a contributor to the Fed Beige Book. Find him on Twitter: @solutionomics.