National Post (National Edition)
Trump urges ‘big’ rate cut as Fed tries to mitigate slowdown
Modest trim expected this week
WASHINGTON • The Federal Reserve is poised to cut interest rates for the second time this year Wednesday as policy-makers try to get ahead of economic risks emanating from a global slowdown, U.S. President Donald Trump’s trade war and uncertainty about the road ahead.
The central bank’s leadership is under immense political pressure from Trump, who denounces its reluctance to slash rates more aggressively on Twitter almost daily.
“Will Fed ever get into the game? Dollar strongest EVER!” Trump said in a tweet Monday. “Big Interest Rate Drop, Stimulus!”
The Fed, which operates independently of the White House, is expected to cut rates just slightly this week, to a range between 1.75 per cent and 2 per cent, in a bid to insulate economic growth as threats to the outlook mount. That remains far above Trump’s previously stated desire for zero or negative interest rates.
Yet even a modest cut could prove contentious as Fed officials wrestle with mixed economic signals and try to gauge whether Trump’s sometimes-hot, sometimes-cold trade war is creating economic uncertainty that can and should be offset by central bank action.
Two members of the policy-setting Federal Open Market Committee voted against the Fed’s July rate cut — its first cut in more than a decade — and may dissent against any further reduction at this meeting, given that the economy is growing and unemployment remains near a 50-year low. Another committee member has voiced support for a larger-than-expected move in the face of global risks.
That discord could make it more difficult for Jerome Powell, the Fed chair, to clearly communicate what comes next at a time when the economic outlook itself is particularly hazy.
Although many investors expect another cut in October and will hang on Powell’s every word for any hint at timing, Powell will probably try to keep the Fed’s options open. He has so far avoided committing the Fed to movement, saying only that it will do what is needed to sustain the economic expansion.
The big question facing the Fed is whether the expansion will need additional support from the central bank.
Inflation has shown signs of moving back toward the Fed’s 2 per cent goal, and consumer spending, the job market and overall growth have remained resilient so far. But Trump’s trade war is denting business investment and exacerbating a manufacturing slowdown, and it is unclear how — or whether — it will be resolved. The United States and China are expected to meet again next month, and both sides have taken steps before that meeting to ease their trade fight. But a deal is not guaranteed, and Trump plans to impose tariffs on nearly all Chinese imports by the end of the year if one is not reached.
Adding to the mixed economic picture: Household confidence is wobbling and the global economic picture is tenuous. Germany, Europe’s largest economy, is on the brink of recession, and Britain is grappling with its contentious exit from the European Union.
“The consumer is doing well, but there are other parts of the economy that aren’t doing well: manufacturing being the obvious one, but business investment is weak, and foreign demand i s w e a k ,” s a i d Michael Feroli, chief U.S. economist at J.P. Morgan, who expects policy-makers to cut rates one more time this year. “I don’t necessarily think they have a plan to go again, but I think the economy will continue to look a little soft.”
A strike on a Saudi Arabian oil facility over the weekend could further complicate the picture. It will at least temporarily disrupt oil supplies and affect prices, though many experts say a severe shock to consumers is unlikely. Still, it opens the door to intensified geopolitical tension.
He i g h t e n i n g Po w e l l ’s communications challenge, the Fed will release new economic projections after the meeting for the first time since June. That means the Fed chair will have to knit his 16 colleagues’ interest rate projections into one comprehensive narrative.
While the Fed is closely monitoring short-term risks, its long-term challenges may be even more daunting. Interest rates will stand below 2 per cent if the central bank lowers them this week, leaving policy-makers with limited room to cut come the next recession. For context, they lowered rates by more than 5 percentage points in reaction to the 2007 to 2009 downturn.
“The Fed simply doesn’t have enough firefighting capability at its disposal to fight even an average next recession, let alone a financial crisis — anything that history would later label a Great Recession,” said David Wilcox, who directed research and statistics at the Fed until last year and is now a senior fellow at the Peterson Institute for International Economics. “We run the risk that the next recession will therefore be that much deeper, that much more prolonged — because the Fed won’t be in a good position to arrest downward momentum once it begins.”
Fed officials often say that they have tools left to bolster the economy. Still, they plan to discuss options for conducting monetary policy amid lower interest rates at their upcoming meetings. The conversations so far seems to centre on keeping inflation from getting stuck in low gear.
The Fed aims for 2 per cent annual price increases, but has not hit that target sustainably since formally adopting it in 2012. That matters in part because inflation gives the central bank headroom to cut interest rates, which do not strip out price gains. Lower inflation makes for even less room to manoeuvre.
One short-term fix, supported in a recent editorial by Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, is to promise to keep rates low until inflation moves back to, or even just above, the central bank’s 2 per cent goal. In theory, such a commitment would prove the Fed’s seriousness and help to keep consumers’ and i nv e s t - ors’ inflation expectations, which have been slipping, from sinking lower. It could provide extra stimulus by making investors expect low rates for longer.