Fed Officials See No Need for Rate Cuts Amid Weak Factory Data

By Tom Ozimek
Tom Ozimek
Tom Ozimek
Tom Ozimek is a senior reporter for The Epoch Times. He has a broad background in journalism, deposit insurance, marketing and communications, and adult education.
January 5, 2020Updated: January 5, 2020

Three top Federal Reserve officials said in separate interviews on Jan. 3 that they have enough confidence in the strength of the U.S. economy to favor maintaining the central bank’s current freeze on further interest rate cuts.

Cleveland Federal Reserve Bank President Loretta Mester, Dallas Federal Reserve Bank President Robert Kaplan, and Chicago Federal Reserve Bank President Charles Evans all said they’ve seen no justification to drop the central bank’s current “on hold” policy.

“I’m pretty happy with where policy is at the moment, and we’ll have to wait and see,” Mester said on Bloomberg.

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Cleveland Federal Reserve President Loretta Mester (L) talks with host Maria Bartiromo on The Fox Business Network on April 1, 2016, in New York. (Rob Kim/Getty Images)

“I don’t think we should be making any moves at this point” on interest rates, Kaplan said on CNBC.

When asked by Bloomberg whether he thought recently published weak factory data showed the economy is in trouble, Evans said, “It doesn’t shake my confidence.”

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Federal Reserve Chairman Jerome Powell (R) tours mHUB, an innovation center, with Federal Reserve Bank of Chicago President Charles Evans, on April 6, 2018, in Chicago, Illinois. (Scott Olson/Getty Images)

Mester and Kaplan will be voting members on the rate-setting Federal Open Market Committee (FOMC) this year, while Evans was a committee member in 2019.

Weak Factory Data

The U.S. manufacturing sector fell into its deepest slump in more than a decade in December, showing weak factory output, orders, and employment.

The Institute for Supply Management (ISM) said its index of national factory activity fell to 47.2 last month from 48.1 in November. It was the lowest reading since June 2009 and, coupled with readings for both new orders and factory employment at multi-year lows, thwarted expectations for a leveling off in the pace of decline in a sector buffeted by trade tensions.

A reading below 50 indicates the sector is in contraction, and December’s reading marked the fifth straight month below that benchmark level.

The manufacturing sector had been under pressure for much of the second half of 2019, as tit-for-tat tariffs by the United States and China slowed the flow of goods between the world’s two largest economies and contributed to a cooling in the pace of global economic growth.

Last month, the two sides announced they had reached agreement on a “phase one” trade deal, and President Donald Trump last week said the accord would be signed Jan. 15 in Washington, and talks to cement a wider “phase two” deal would begin shortly.

“Global trade remains the most significant cross-industry issue, but there are signs that several industry sectors will improve as a result of the phase one trade agreement,” Timothy Fiore, chairman of ISM’s manufacturing business survey committee, said in a statement.

While ISM’s overall measure of activity in December was the lowest in more than a decade, Fiore said on balance, the contraction remains relatively shallow.

“It’s not super low,” he said on a conference call. “We’re still in that range of slight contraction to slight expansion.”

Typically, the index would have to drop below 43 to signal the risk of a wider economic recession. Weakness in the manufacturing sector was one of the concerns that spurred the U.S. Federal Reserve to cut interest rates three times last year, although the central bank appears to be done with lowering borrowing costs for now, with officials like Federal Reserve Chairman Jerome Powell satisfied that the economy is in “a good place.”

Worry About Low Inflation but No Drive to Cut Rates

On Jan. 3, the Fed released the minutes of its December interest-rate-setting meeting, showing that FOMC members are concerned about low inflation but confident enough in the U.S. economy to hold rates steady going forward.

At a December meeting of the Fed’s policymaking body, officials voted to keep their benchmark interest rate in a range between 1.5 percent and 1.75 percent.

At three earlier meetings, committee members slashed the target federal funds rate by a quarter percentage point each time.

The minutes—and insight into how central bank officials are weighing policy moves in support of higher or lower interest rates (pdf)—show committee members highlighting risks to the economic outlook from global economic softness and below-target inflation in the United States.

“Global developments, related to both persistent uncertainty regarding international trade and weakness in economic growth abroad, continued to pose some risks to the outlook, and inflation pressures remained muted,” the committee stated.

Remarks in the document echo those of Powell, who warned reporters that inflation running too cool for too long could sap sentiment and nudge the economy into a downturn.

“While low and stable inflation is certainly a good thing, inflation that runs persistently below our objective can lead to an unhealthy dynamic in which longer-term inflation expectations drift down, pulling actual inflation even lower,” Powell said after December’s FOMC (pdf).

He complained that “inflation continues to run below our symmetric 2 percent objective.”

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Federal Reserve Chairman Jerome Powell testifies during a House Financial Services Committee hearing on Capitol Hill on July 10, 2019. (Zach Gibson/Getty Images)

Over the 12 months through October, a measure of core inflation—which doesn’t include food and energy prices, due to their volatility—was 1.6 percent in the United States.

Still, the FOMC saw enough signs of economic strength to hold the benchmark rate steady. The minutes show that members expected sustained economic expansion, a resilient labor market, and inflation near the committee’s symmetric 2 percent goal as likely outcomes.

Real GDP in the United States rose 2.1 percent in the third quarter of 2019, according to the Bureau of Economic Analysis.

The committee said it would continue to monitor the economic outlook, including labor market conditions, inflation expectations, and readings on financial and international developments.

Powell signaled the Fed’s readiness for decisive steps in case of future softening.

“We’re strongly committed to achieving our symmetric 2 percent inflation goal,” he insisted.

The Fed and Mortgage Rates

The Fed has a dual mandate to foster price stability and maximum employment, which it aims to achieve through three tools of monetary policy: open market operations, the discount rate, and reserve requirements.

Using the three tools, the Fed influences the federal funds rate, which is the interest rate at which banks and other depository institutions lend balances they keep at the Fed to other banks and institutions overnight.

“Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services,” the Fed explains.

It’s a misconception that the Fed sets or directly affects mortgage rates. The federal funds rate has only an indirect impact on the cost of home loans, which is moderated by markets.

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A comparison of a decade of federal funds rates, U.S. 10-year Treasury maturity rates, and mortgage rates shows a high correlation between the latter two. In contrast, the Fed-driven interest rate curve has a markedly different shape.

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Mortgage Rates Drop

The United States’ long-term mortgage rates declined slightly last week, remaining close to historically low levels.

Mortgage buyer Freddie Mac said Jan. 2 the average rate for a 30-year fixed-rate mortgage eased to 3.72 percent from 3.74 percent last week. The benchmark rate stood at 4.51 percent a year ago, from a 10-year peak of 5.21 percent in April 2010.

The average rate on a 15-year mortgage slipped to 3.16 percent from 3.19 percent.

Reuters contributed to this report.