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June 20, 2019, 1:00 p.m. EDT

What would it take to stop a Fed interest rate cut in July? A lot, economists say

A genuine breakthrough in U.S./China trade dispute is a prerequisite

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By Greg Robb, MarketWatch


Bloomberg News/Landov Enlarge Image
Fed Chairman Jerome Powell told reporters the case for additional easing has strengthened since May.

What would it take to prevent the Federal Reserve from easing monetary policy next month? A lot, according to economists.

Two things are prerequisites - a genuine breakthrough in the U.S. China trade dispute and a dramatic turnaround in the economic data.

The only real debate among Fed watchers is whether there is a quarter-point or a half-point cut in benchmark interest rates after the next policy meeting on July 30-31.

Economists were genuinely surprised by how dovish the Fed policy statement and Fed chair Powell’s comments were at Wednesday’s June meeting.

Former Fed Governor Laurence Meyer called it “just about the biggest dovish turn possible without an actual rate cut.”

Eight Fed officials now project at least one interest rate cut this year in their baseline projections. The Fed also removed the description of its stance as “patient” and said it would now “closely monitor” the data, suggesting recent indications of slowing economic growth have got the central bank’s attention.

Read: Fed holds interest rates steady—but removes ‘patient’ pledge

After the press conference, Seth Carpenter, a former Fed staffer, and now economist at UBS, reversed his call, going from forecasting no rate cuts in 2019 to a 50 basis point cut in July.

“We had always expected them to err on the side of hiking too little rather than too much. But they have gone further and now seem to want to cut, despite growth being above the estimate of potential growth,” Carptenter said.

“The bar is now low for a rate cut.”

Lou Crandall, chief economist at Wrightson ICAP, said that prior to Powell’s press conference, his sense had been that the data over the next six weeks would have to confirm the case for a rate cut in order to persuade the Fed to move.

“We now think the data merely have to avoid contradicting the case for a rate cut in an obvious way,” he said.

Any “ambiguity” in the data would just pave the way for a rate cut. If there is any further deterioration in economic trends, the Fed could easily cut its benchmark rate by 50 basis points, Crandall said.

The Fed will not have much new economic data to consider before their next interest-rate committee meeting at the end of July.

There will only be one more payrolls and employment report and the first look at second quarter GDP growth.

Jan Hatzius, chief economist at Goldman Sachs, also reversed his call for no rate cuts this year, saying he now sees two quarter-point easing moves in July and September.

“The hurdle appears to be very high for the committee to forego a cut in July,” he said.

The increasingly obvious connections between President Trump’s preference for import tariffs against China in particular, and disruptions to global manufacturing supply lines, and slowing global economic growth may be behind the Fed’s change of policy. “Uncertainties surrounding the outlook have clearly risen since our last meeting,” Fed said Powell said Wednesday.

If President Trump and Chinese President Xi Jinping simply try to paper over their differences at their planned meeting at the G-20 leaders meeting in Tokyo at the end of next week, this would not be enough to forestall a Fed policy easing, said Josh Shapiro, chief U.S. economist at MFR Inc.

“Trump and Xi might want to pat each other on the back to calm everyone down and give each other a win, but the key dispute over intellectual property is long-term,” Shapiro said, in an interview. Chinese companies have been accused of misappropriating U.S. corporate intellectual property and forcing them to hand it over in exchange for permission to operate in China.

Shapiro said the Fed might hold rates steady if Trump and Xi “become best buddies and the global economic data improves.”

“That’s probably all fantasy-world stuff,” Shapiro added.

U.S. stock indexes extended gains to a fourth straight day on Thursday, testing fresh records on expectations of a Fed rate cut soon. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.09%   rose 191 points to 27,735, marking its highest trading level since Oct.3. The S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.28%   gained 21 points to 2,947, trading above its April 30 closing record at 2,945.83.

Markets might get a clearer sense of the Fed’s plans in mid-July when Fed chairman Jerome Powell may deliver his semi-annual report to Congress on monetary policy.

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Greg Robb is a senior reporter for MarketWatch in Washington. Follow him on Twitter @grobb2000.

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