What comes next?
Central bankers expected to lower borrowing costs this week
SAN FRANCISCO — U.S. central bankers are expected to lower borrowing costs this week for the first time since the depths of the financial crisis more than a decade ago. That’s the easy part.
Whether that inaugurates a series of quarter-percentagepoint interest rate cuts that could stretch deep into next year, as financial markets are betting, or something more limited, is by far the harder decision facing Federal Reserve policymakers.
One reason: No clear consensus from Fed officials about why they need to cut rates in the first place, particularly with the U.S. unemployment rate near a 50-year low and the American economy puttering along as the best-in-class performer among developed nations.
Is it a bit of insurance against risks posed by slowing global growth and trade tensions? A step to bolster sluggish inflation? A bid to lift labor markets further? An effort to right kinks in the bond market? Over the last several weeks, Fed policymakers have floated each of these ideas and others.
New York Fed President John Williams even briefly convinced markets the Fed planned to cut rates by half a percentage point this week, until the New York Fed issued a statement to explain that his remarks about “vaccinating” the economy against serious illness were academic in nature and not meant to signal nearterm policy decisions.
Complicating matters is the Fed’s desire to make clear that loosening monetary policy is not a reaction to months of pressure from U.S. President Donald Trump to do just that.
Investors should get some clarity when the Fed’s rate-setting committee releases its policy statement at 2 p.m. EDT (1800 GMT) on Wednesday after the end of a two-day meeting. Fed Chairman Jerome Powell will hold a press conference shortly after.
CROSSCURRENTS
Economists and traders overwhelmingly expect the Fed to cut its policy rate by a quarter of a percentage point on Wednesday, matching the size of each of the nine rate hikes the Fed delivered from 2015 to 2018.
The big debate at the July 30-31 meeting will be about what comes next, and how to communicate it, Cornerstone Macro economist Roberto Perli said.
“I bet the statement will ... leave the door open to more, to at least another 25 (basis-point cut) down the road,” Perli said.
But as for what economic threshold would trigger a further rate cut, he said, “I don’t think they have a clear idea.”
The federal funds rate is currently set in a range of 2.25% to 2.50%. Traders of futures tied to the rate have priced in a full percentage-point drop by the end of next year. But the economic picture now is quite different from the last few times the Fed has cut rates.
Since the Fed’s last rate-setting meeting in mid-June, economic data on retail sales and job creation have been stronger than expected, and durable goods orders, a proxy for business spending plans, jumped in June. At the same time, U.S. home sales tumbled, manufacturing has been weak for months, and exports are down.
A report on Friday showed robust consumer spending kept the U.S. economy growing at a 2.1% pace in the second quarter, a smaller slowdown than expected. But it also underscored the weak business investment and inflation that has worried Powell.