The Federal Reserve official will meet in two week to decide whether it is prudent to cut interest rates for a third time in as many months. Officials began debating the subject last month, when they cut their benchmark rate to a range between 1.75% and 2%.
Recent data has shown global manufacturing is declining and the Federal Reserve may chose to lower rates to combat the downturn rather than starting an open-ended stimulus effort.
Investors in interest-rate futures markets have a strong expectations of a cut at the October, as high as 85% probability as of Thursday afternoon, according to CME Group.
“Our policy actions have been very helpful to keeping the economy on track and to manage some of the risks we were facing,” New York Fed President John Williams told reporters after a speech Thursday. “Looking forward, I think we just have to take this same approach, this meeting-by-meeting approach.”
“We will act as appropriate to sustain [the] low unemployment rate and solid growth and stable inflation,” said Mr. Clarida in an interview on Oct. 3. “And we said that in June and July and September, and I’m saying it to you tonight.” Fed Vice Chairman Richard Clarida will speak Friday.
“The risk is that even a balanced message that avoids sending a clear ‘we are done’ message results in a selloff” in short-term bonds, sending interest rates up and stock prices down, said Jan Hatzius, chief economist at Goldman Sachs, in a report last week.
Mr. Powell has referenced episodes in 1995 and 1998 when soeaking of cuts. “The Fed cut, and then cut again, and then cut a third time,” he said last week. “The economy took that accommodation on board and gathered steam again, and the expansion continued. So that’s the spirit in which we’re doing this.”
Chicago Fed President Charles Evans said Wednesday, “There is an argument for more accommodation now to provide some further risk-management buffer against these potential events.”
The Fed received positive feedback from the market recently as market-determined interest rates, which tumbled in July and August, have stabalized. As a result, long-term interest rates have risen back above short-term interest rates making the likelihood of seeing an ivert yield curve again which is often precedessor to a recession.
In projections released at last month’s meeting, seven officials penciled in one more cut this year. Five signaled they believed last month’s cut was a mistake, while another five supported the cut but saw no need to lower rates again.
Despite those divisions, Mr. Powell clearly has the votes to deliver on whatever decision he makes. “When you have this, this wide range of views, I think the chairman’s views become even more important,” said Minneapolis Fed President Neel Kashkari in an interview last week.