Likely Fed rate cut raises questions
WASHINGTON – Not since America’s financial system and economy appeared to be in grave danger – back in December 2008 – has the Federal Reserve cut its benchmark interest rate.
Yet, that is just what the Fed is set to do when it ends its latest policy meeting Wednesday at a time when the U.S. economy looks infinitely sturdier than it did in the depths of the Great Recession.
The Fed under Chairman Jerome Powell has nevertheless signaled its belief that uncertainties and threats unleashed by President Donald Trump’s trade war and by a global slowdown justify a Fed rate cut now as a kind of insurance policy against another economic downturn.
That message has raised a raft of questions about how much the Fed intends to reduce borrowing rates and whether it should really be cutting rates at all now. A news conference Powell will hold after the Fed issues a policy statement could help shed light on the likely path ahead for the central bank.
Here are some things to watch for after the Fed meeting ends Wednesday afternoon:
One and done – or more?
Market traders foresee a 100% chance of a cut Wednesday in the Fed’s key short-term rate, according to the CME Group, which tracks this trading. The largest proportion of traders – 78% – expect a modest quarterpoint cut from the current range of 2.25% to 2.5% for the Fed’s influential rate.
For the rest of 2019, expectations for additional rate cuts range more widely, with economists more restrained and investors with a more expansive outlook. The CME Group said 56% of traders expect a second rate cut in September. About half think rates will be cut a total of three or even four times before the year ends.
Look for Powell’s news conference to be dominated by questions about whether, why and by how much the Fed might further ease credit through the rest of the year.
Economic growth and inflation
This week, the Fed’s policymakers won’t be updating their forecasts for the economy and for the direction of interest rates – something they do four times a year. But their policy statement will be scrutinized for any subtle changes in its description of the economy that might provide hints of the Fed’s thinking.
The Fed’s previous policy statement had described the job market as strong and said economic activity was rising moderately. Yet, it also noted that inflation had continued to run persistently below the Fed’s target level.
Ultra-low inflation can slow growth by causing consumers to postpone purchases, which, in turn, slows consumer spending, the economy’s main fuel. Persistently subpar inflation is considered a key reason why the Fed has shifted from last year’s four rate increases to the expectation of rate cuts this year.
Trade and other uncertainties
In its policy statement last month, the Fed noted that “uncertainties” about the economic outlook had increased, and it pledged to “act as appropriate to sustain the expansion.”
The statement didn’t specify what the increased uncertainties were. But in his previous news conference and in his testimony this month to Congress, Powell mentioned weakening global growth, trade frictions stemming from Trump’s use of tariffs and the risk of a botched exit by Britain from the European Union in October.
The government reported last week that the U.S. economy, as measured by the gross domestic product, slowed to an annual growth rate of 2.1% in the AprilJune quarter, down from a 3.1% pace in the JanuaryMarch period. Although some temporary factors contributed to the slowdown, many economists said they think growth will keep slowing for the rest of this year.
Trump has been escalating his attacks on the Fed over the past year, blaming the four rate hikes in 2018 as a key reason why the economy is slowing.
Powell has previously asserted that Trump’s pressure has had no effect on the rate policies of the Fed, which is considered an independent agency. But the president’s public attacks raise the question for Powell of whether the criticism could undermine confidence that the Fed will remain politically independent and not try to boost the economy before next year’s presidential election.