Is the Stage Set for a Rate Cut Later This Year?

IRIS.xyz  |

Source: IRIS.xyz

By Tim Benzel for IRIS.xyz

When the Federal Open Market Committee met in late January, we wrote that the meeting was somewhat of a snoozer as no rate changes were made and the economic outlook was generally left in place. However, the discussion around the potential change to the Fed’s 2% inflation targeting approach caught our eye as we believe a change to the current approach has the potential to be a market moving event later this year.

The minutes of the January meeting were released last week, which, along with some public comments from an FOMC official, provide us a bit more context into the Committee’s thinking. According to the minutes, “several” FOMC participants believe “employing an asymmetric operational range for a time – with 2% being at or near the lower end of that range- while still maintaining the longer-run target of 2% could help communicate that the Committee intended inflation to average 2% over time, which in turn could help keep longer-run inflation expectations at levels consistent with its objective.”

Following-up on that, Fed Governor Lael Brainard said in a speech: “I prefer flexible inflation averaging that would aim to achieve inflation outcomes that average 2 percent over time. Flexible inflation averaging would imply supporting inflation a bit above 2 percent for some time to compensate for the inflation shortfall over previous years and anchor inflation expectations at 2 percent. Flexible inflation averaging would bring some of the benefits of a formal average-inflation-targeting rule, but it could be more robust and simpler to communicate and implement. Following several years when inflation has remained in the range of 1-1/2 to 2 percent, the Committee could target inflation outcomes in a range of 2 to 2-1/2 percent for a period to achieve inflation outcomes of 2 percent, on average, overall.”

We believe these comments are setting the stage for rate cuts later this year to make up for what has been persistently sub-2% inflation. Of course, the economic impacts of the coronavirus are also becoming more acute in the near term, which is driving long-term rates lower and could also give the Fed reason to lower the Fed Funds Rate. In sum, we continue to look for easier monetary policy as there is little to no pressure for the Fed to do anything but ease.

Source: Federal Reserve, NatWest Markets

Tim Benzel, CFA, is a Senior Portfolio Manager at SNW Asset Management, a unit of Invesco.

Original article at IRIS.xyz

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Equities Contributor: IRIS.xyz

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