Fed poised to cut interest rates

The Federal Reserve this week will most likely cut interest rates for the first time since 2008, when the economy was mired in a deep recession, as the central bank tries to keep a record economic expansion from petering out.

The expected change, while likely to be small, will end an era of gradual rate increases intended to return the economy to a more “normal” state in the wake of the Great Recession, when the Fed slashed rates to near zero as it tried to rescue the economy. The Fed’s approach has largely worked — the U.S. economy is growing, unemployment is at a 50-year low and wages are slowly rising.

But a rate cut at this moment in the cycle sends a signal: The current economy could be as good as it gets.

The Fed’s move Wednesday may cheer President Donald Trump, who has jawboned the central bank for a year over its 2018 rate increases, saying the economy would have gone up “like a rocket” had the Fed not gotten it wrong.

“The Fed acted too soon. I turned out to be right, they acted too soon and too violently,” Trump said Friday at the White House.

But the Fed, which operates independently of the White House, is likely to make a move driven by precaution, not politics, as it tries to inoculate the economy against the harmful effects of slowing global growth and Trump’s trade war.

While the U.S. economy continues to chug along, cracks are beginning to show. Manufacturing gauges, which often lead the rest of the economy, are slumping across the world. Business investment and confidence have suffered under Trump’s trade spats and tariffs. A potent recession indicator is flashing red — rates on 10-year bonds have been lower than those on 3-month government securities, a sign that investors are pessimistic about the future.

The effect of Trump’s $1.5 trillion tax cut is waning and businesses report that they are holding off on expanding, in part because of concern about global economic growth and a protracted trade dispute between the United States and China. Gross domestic product, the broadest measure of goods and services produced in the economy, rose at a 2.1 percent annual rate in the second quarter, according to data released Friday. That is a decent pace, but it shows the economy is reverting to normal after a 3.1 percent growth rate in the first quarter.

Jerome Powell, the Fed chairman, has been signaling a possible rate cut, telling lawmakers this month that “the uncertainties around global growth and trade continue to weigh on the outlook” and that the Fed would act as needed to sustain the economic expansion.

Anticipation of a cut may already be providing a slight economic jolt by lowering consumer interest rates and sending stocks soaring, giving companies more reason to invest and consumers an extra nudge to buy a house or a car. The Fed raised rates nine times in total, and four times in 2018, before pausing this year. This move is seen by many as a recalibration to help the economy remain on track, not the start of a cycle that will return rates to rock bottom.

Yet in cutting now, the Fed is effectively ending its campaign to put economic policy back to normal. The shift confirms that interest rates will be much lower from now on, leaving the economy in a much more fragile state.