Scapegoat Fed poised to cut interest rates again

Facing a dauntingly uncertain economic horizon and ceaselessly pelted with insults and demands for stimulus from the US president, the Federal Reserve is set to cut interest rates in the coming week.

Chair Jerome Powell has at times struggled to send markets a clear message, but he has sent signals that lower rates are coming. In speeches and public appearances, Powell promised the Fed will “act as appropriate” to preserve the expansion.

While the economy is in a “good place”, he has warned of “significant risks” to a deteriorating outlook, persistently low inflation and a trade war that looks set to drag on — views echoed by influential New York Fed president John Williams. Translation: the Fed is cutting.

Futures markets overwhelmingly forecast the Fed will lower rates on Wednesday. Another cut before the end of the year is more likely than not.

Kathy Bostjancic, chief US financial economist at Oxford Economics, told AFP her firm expects three more cuts this year, meaning the central bank will cut at every policy meeting left in 2019.

“It’s good that the economy is not crumbling right now,” she said, “and that’s a good time to take out some stimulus.”

Which of course raises the question: why cut rates again?

The sky is not falling. Consumer spending is resilient. Inflation is firming. Wages are up. Job creation is healthy. GDP growth seems to be holding up. Business and consumer confidence is softening but still high.

So why the pit-of-the-stomach feeling among so many?

For starters, the only thing sustaining the US economy at the moment is consumer spending, which accounts for two-thirds of GDP. By the time that starts to weaken, it will be too late — the recession will have begun already. Hiring, while strong, has slowed. Business investment is moribund. Exports are weakening. And manufacturing — always a vital economic weather vane — is in recession.

Meanwhile, the global economy is slowing.

To top it off, President Donald Trump may not know how to end the trade fight he picked 18 months ago with China. Higher tariffs and uncertainty have moved from posing a risk to actually hurting the economy, including job losses — about 11,000 in August alone, according to one estimate.

Beijing and Washington in recent days have made olive branch gestures, lifting market hopes of a resolution, or at the very least a truce in a conflict that deteriorated badly after the Fed’s rate cut in July.

But there is a risk the good feelings may not endure. After all, truces reached in December and June did not last long.

“We’ve been let down before,” Bostjancic said.

Policymakers face the added burden of trying to be heard over the din of Trump’s unprecedented public assaults on the central bank, she said.

Before addressing solemn commemorative ceremonies at the Pentagon on the morning of September 11, Trump took to Twitter to lambaste policymakers as “boneheads”.

Since the central bank’s last policy meeting at the end of July, he has tweeted out complaints and attacks on the Fed once every 22 hours on average, descending ever further into name-calling and denigration.

Despite hailing the economy’s vigour, Trump has demanded stimulus of the kind reserved for dire economic crises, calling for benchmark rates of “ZERO or less”.

“I don’t think they really think too much about that,” said Joseph Gagnon, a former Fed economist now at the Peterson Institute for International Economics. “Trump is happy to have a scapegoat that he can blame when something goes wrong.”

He added: “I don’t think he really wants the Fed to follow his advice anyway because if the Fed follows his advice and things go badly, he’ll be blamed.”