Though there’s virtually no chance the Fed will change interest rates at its meeting next Tuesday (Sept. 16), there’s a growing likelihood it will make subtle changes in the language of its policy statement, placing greater emphasis on the risks to growth than the threat of inflation.
And, according to a CNBC report, that may be the first step in a stunning policy reversal that could lead to yet another interest rate cut at the end of this year or early 2009, a move widely considered out of the question as little as a week ago.
With both the labor market and consumer spending behaving worse than expected and the economic growth of the second quarter likely to peter out sometime in the following two quarters, the Fed’s aggressive rate cutting earlier this year looks unlikely to achieve a soft landing.
The FOMC statement could “set the stage and give themselves some flexibility,” says veteran money manager James Awad, managing director of Zephyr Management. “I think they absolutely could” cut rates, particularly if things looked “dire” around the holiday shopping season.
It’s widely accepted that a good part of the Fed’s easing was directed at the credit crunch and that it expected more of a bounce from the government’s massive fiscal stimulus package of late February.
“There’s powder left,” says Robert Brusca of the Fed’s monetary policy ammunition.
Though the dynamics of a presidential election arguably complicate the Fed’s policy choices this fall, the central bank’s close attention to labor market trends this year and in previous economic downturns suggest a rate cut can’t be ruled out.
“The monthly employment report has figured prominently into the Fed’s policy deliberations,” economist Christopher Rupkey of Bank of Tokyo-Mitsubishi said in a recent note to clients.