The U.S. economy is growing slower than it has in the past couple of years, as expected, and conditions may get worse in the next few quarters, according to Federal Reserve Bank of St. Louis President James Bullard.
Trade issues, slowing global growth, weakness in manufacturing, sluggish U.S. business investment, and yield curve inversion pose downside risks to growth, he said. “U.S. monetary policy may be too restrictive for the current environment,” Bullard told an audience in Illinois, according to text released by the Fed.
“A sharper-than-expected slowdown may make it more difficult for the Federal Open Market Committee (FOMC) to achieve its 2% inflation target,” he said.
The FOMC has already cut rates by 25 basis points twice in an effort to insure that the expansion continues and, to that end, could offer more accommodation in the future, although “decisions will be made on a meeting-by-meeting basis,” he said.
Bullard doesn’t see a speedy resolution to trade issues, and said, “U.S. monetary policy cannot reasonably react to the day-to-day give-and-take of trade negotiations.”
Trade policy uncertainty is high and this “creates a disincentive for global investment,” Bullard added. “Accordingly, the global growth environment looks weaker in recent quarters.”
The 2/10 yield curve, which had inverted, is back in positive territory, he said, “likely because markets are anticipating future policy moves by the FOMC, and so we are not seeing an intensification of the yield curve inversion so far.”
Williams
In a speech reiterating the importance of recognizing use of LIBOR will end on Jan. 1, 2022, to be replaced by SOFR, Federal Reserve Bank of New York President John Williams discussed the recent volatility in the funding markets.
“We were prepared for such an event, acted quickly and appropriately, and our actions were successful,” he said. "It is equally important that we examine these recent market dynamics and their implications for the liquidity needs in relation to the overall amount of reserves held at the Federal Reserve.”
To that end, he said, the Fed “will continue to monitor and analyze developments closely.” He pointed to Federal Reserve Board Chair Jerome Powell’s latest press conference, where he said the Fed will determine when “to resume organic growth of the Federal Reserve’s balance sheet consistent.”
Separately, in a televised interview, former New York Fed President William Dudley said the bank is likely to consider “introducing a standing repo facility, so whenever there is upward pressure on short-term rates, there is a facility that people can come to and do repo with, and that would sort of take away any risk of a big upswing.”
Increased volatility will remain through this year, and perhaps longer, according to Bank Leumi First Vice President Bozidar Jovanovic. Unresolved issues, most notably the U.S.-China trade war, “continue to overhang the markets.” With no resolution in sight, the trade war appears to be “a protracted dispute.”
National Activity Index
The Chicago Fed National Activity Index (CFNAI) suggested the economy was growing slightly above trend in August, as the main index rose to positive 0.10 from negative 0.41 in July, the Bank said Monday. The three-month moving average narrowed to negative 0.06 from negative 0.14, while the Diffusion Index improved to negative 0.12 from negative 0.20.
Production-related indicators was the only category that made a positive contribution to the index in the month, although the other three improved from July to August.
