How Does Fed Policy Impact the ECB and Other Central Banks?
The Federal Reserve won’t ease interest rates if core inflation softens, according to a new Bloomberg survey of economists, contradicting investors who expect the central bank to cut later this year.
Respondents to the April 23-25 poll saw the target range for the benchmark federal funds rate staying right where it is -- at 2.25 per cent to 2.5 per cent -- through 2020, according to median expectations. Only two of the 39 economists polled forecast a rate cut in 2019. Pricing in interest rate futures, meanwhile, showed investors assigned almost a 70 per cent probability to a rate cut by December.
Economists and market participants alike expect Fed policy makers to make no change to rates when they gather for two days next week in Washington. A 2:00 p.m. statement on May 1 will be followed by a 2:30 p.m. news conference with Chairman Jerome Powell. Officials won’t update their quarterly forecasts, including the dot plot of interest rate projections, until their next meeting in June.
In response to other survey questions, economists made it clear they don’t believe the Fed will rush into either a hike or a cut as economic conditions evolve.
“The Fed’s going to sit tight for the foreseeable future,” said Ryan Sweet, head of monetary policy research at Moody’s Analytics Inc.
Sweet said the Fed will be mostly guided by inflation in the coming months amid concerns that price pressures have been running below its 2 per cent target. But he didn’t expect that a further drop in the central bank’s preferred gauge of core inflation would result in a cut unless it were significant and sustained.
Treasuries climbed on Monday after a Commerce Department report on first quarter economic growth signaled tepid inflation. Gross domestic product surpassed all analyst expectations with a 3.2 per cent annualized advance, but more than half the gain came from the volatile trade and inventories components that may soon reverse.
Economists in the survey rejected the notion that President Donald Trump had influenced the Fed, with 69 per cent saying his repeated criticisms of monetary policy had no impact on decision making at the central bank.
Two-thirds of respondents also said they didn’t think it likely that Stephen Moore, who Trump has said he would nominate for an open seat on the Fed’s Board of Governors, would ever be confirmed to the position. If he were confirmed, however, a narrow majority said Moore would influence policy in a dovish direction.
Moore, a former campaign adviser to Trump and economics commentator, has said the Fed’s December quarter-point rate increase was a mistake and that officials should cut rates by half a percentage point.