Nick, & Cindy Davis

Fed likely to leave rates alone

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Jerome Powell has tantalized the financial world with the prospect that the Federal Reserve he leads may soon cut rates of interest for the first time in more than a decade.

Fed likely to leave rates alone but signal readiness to cut

Fed likely to leave rates alone but signal readiness to cut

 

Probably not quite yet, though.

When the Fed issues a policy statement Wednesday and Powell holds a news conference, the message will more than likely echo the theme the chairman struck in a speech early this month: That the Fed will act if it thinks the Trump administration’s trade conflicts are threatening the U.S. economy.

Powell’s remarks were viewed as a signal that the Fed will probably cut rates later this year, and the stock market surged as a result.

Yet economists say when – or even whether – the Fed eases credit this year would depend on numerous factors that are difficult to predict. Will Trump’s trade wars be resolved before they inflict real damage on the economy? Will the job market remain resilient? Will inflation finally edge close to the Fed’s target level?

Investors collectively envision a Fed rate cut by July and maybe further cuts subsequently. Some are even betting on a rate cut this week. Many economists, though, think the Fed will wait until September at the earliest to announce its first drop in its benchmark short-term rate of interest since 2008 and may even not cut again in 2019. A few Fed watchers foresee no rate cut at all this year.

The Fed is meeting this week against the backdrop of President Donald Trump’s trade war with China, with its escalating tariffs and counter-tariffs on each other’s products. The trade war has magnified concern and uncertainty for businesses and investors about whether and how much the economy will be affected.

The U.S. manufacturing sector, specifically, is weakening. On Monday, the Federal Reserve Bank of New York reported that an index it compiles of manufacturing in New York state plunged this month into negative territory – to its lowest point since 2016. The index reflects manufacturing conditions in the state.

Trump is expected to meet with President Xi Jinping of China at a Group of 20 nations summit in Japan at the end of this month. The Fed may want to determine if that meeting produces any breakthrough in the U.S.-China trade war before deciding whether the economy requires an interest rate cut.

“I think any Fed move this week would be premature,” said Sung Won Sohn, an economics professor at Loyola Marymount University in Los Angeles.

Still, some Fed watchers believe that in the policy statement the central bank will issue Wednesday, it will replace a reference to being “patient” about rate changes to some new phrasing that may hint at a forthcoming rate cut should it decide the economy needs it. When the Fed adjusts its key short-term rate, it influences rates on everything from mortgages to credit cards to home equity lines of credit and may help stimulate the economy.

Analysts expect the Fed’s description of the economy to note signs of a slowdown.

“I think the Fed will talk about the weakening labor market and softness in business investment to acknowledge that growth has downshifted,” said Mark Zandi, chief economist at Moody’s Analytics. “The statement will reinforce the message that Powell has already articulated that the economy is slowing and the trade war will pose an additional threat if it escalates.”

Most analysts say they believe economic growth has slowed sharply in the current April-June quarter to around a 1.5% annual rate, only half the speed of the past year.

Unemployment remains at a 50-year low of 3.6%, though job growth slowed to just 75,000 in May, a potential sign that some employers have become more cautious about hiring.

Trump, getting ready for his 2020 re-election campaign, has been escalating his public attacks on the Fed, a highly unusual move that has raised concern that he is undermining the Fed’s independence as a central bank. The president has stated that under Powell’s leadership, the Fed hurt the economy by tightening credit too much last year and by neglecting to lower rates since then.

In television interviews last week, Trump insisted that the Fed’s policies have been “very destructive to us” and argued that the economy and the stock market could possibly be performing much better under a looser interest-rate policy. When Powell has been asked about Trump’s attacks on the Fed, he has replied simply that the central bank is going to do whatever it thinks suitable for the economy regardless of political pressures.

Though most analysts think the Fed will cut rates at least once before the year ends, others foresee no changes at all this year, specifically if the U.S.-China trade war is resolved and the economy and the job market appear solid.

“If there is a rate cut this year, I think it will be much later in the year, and I don’t see more than one cut,” said David Jones, an economist and veteran Fed watcher. “I just think the Fed would like to stick with what they’ve got. They are solidly in neutral at the moment.”

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