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Fed Faces Tricky Choice Amid Looming Risks and Trump Pressure Fed Holds Rates Steady but Cracks Open the Door to a Cut
(about 7 hours later)
WASHINGTON — Federal Reserve officials are expected to leave interest rates unchanged on Wednesday, but officials face a tough decision as economic data sends conflicting signals, trade tensions run high and political pressures mount. WASHINGTON — Federal Reserve officials left rates unchanged at their June meeting but signaled that they were prepared to cut if trade tensions worsen and risks to the American economy intensify.
Overall growth and consumer spending remain strong a decade into the economic expansion, but job gains are slowing, the factory sector is weakening and inflation is stubbornly below the central bank’s 2 percent goal. Officials aim for low and steady price gains, in part because they guard against economy-harming deflation. While the Fed still expects a strong labor market and inflation near its goal, “uncertainties about this outlook have increased,” according to the central bank’s post-meeting statement, released Wednesday. Fed officials marked down their assessment of overall economic activity, calling it “moderate” instead of May’s “solid.”
President Trump’s trade spat with China has also escalated since the central bank’s early May meeting, magnifying the risk of a slowdown. Mr. Trump increased tariffs on $200 billion worth of Chinese goods only days after the Fed’s last gathering, and has threatened to tax an additional $300 billion worth of imports if he and President Xi Jinping cannot reach a deal. Mr. Trump said on Tuesday that the two leaders were set to talk at a Group of 20 meeting this month, at which point the trade outlook could either worsen or de-escalate. Fed Chairman Jerome H. Powell, in a news conference following the meeting, pointed to President Trump’s renewed trade war with China and softening global growth as reasons the Fed may shift away from it’s “patient” stance and move toward a rate cut in the coming months.
Mr. Trump has not relented in his steady critique of the Fed, blasting it for keeping rates too high to his 61 million Twitter followers. Fed officials — who are independent of the White House — will overlook those comments, but his focus on the Fed will nevertheless pump up the visibility of their decision. The president intensified his line of attack on Tuesday, suggesting that he has prepared to try to demote the Fed chairman, Jerome H. Powell, if he does not move toward easing rates. “In the weeks since our last meeting the crosscurrents have re-emerged,” he said, “raising concerns about the strength of the global economy.”
[Bond investors have made up their minds: Rates will fall (at some point)] The policy-setting committee is increasingly divided. While the central official among the Fed’s 17 policymakers expects to leave rates unchanged this year, a growing number of decision makers expect to reduce rates.
“They’re going to be making an announcement pretty soon, so we’ll see what happens,” Mr. Trump said, when asked by a reporter whether he would take the unprecedented step of trying to strip Mr. Powell of his chairmanship. “I want to be given a level playing field, and so far I haven’t been.” And for the first time during his tenure, Mr. Powell did not have a unanimous vote on a decision to hold rates steady. James Bullard, the president of the Federal Reserve Bank of St. Louis, dissented, indicating he wanted to lower rates at this meeting.
Against that charged backdrop, most Fed watchers expect Mr. Powell and his colleagues to leave rates unchanged for now but signal that they are open to cutting them should the economic outlook worsen. “A number of those who wrote down a flat rate path agree that the” case for additional accommodation has “strengthened” since May, Mr. Powell said. “We will use our tools as appropriate to sustain the expansion.”
That could buy the Fed time to see how the China trade war plays out. Several economists said they expect a clear signal that a cut is coming soon, and a few think it is possible that officials will act as early as this week. Moving quickly could help the Fed prove that it is committed to its inflation target, and to stave off an economic slowdown before one becomes a reality. The decision to hold rates steady came despite ongoing pressure from President Trump, who on Monday suggested he might demote Mr. Powell if the central bank did not move toward easing rates.
“You take all of these factors together, and it starts to look like some recalibration of policy to get ahead of these risks seems warranted at this point,” said Julia Coronado, the founder of MacroPolicy Perspectives. She expects the Fed to leave rates unchanged in June while signaling preparedness for a cut in July, but also sees a chance of a move at this meeting. “It would make the message very clear,” she said. Investors seemed to find little new information in the Fed’s policy statement at 2 p.m. Shortly after the central bank announced its decision to leave rates unchanged, the S&P 500 was up 0.3 percent. Yields on government bonds — which are closely tied to monetary policy — declined, with the yield on the 10-year Treasury note falling to 2.04 percent.
The Fed will release its statement and a quarterly set of economic projections at 2 p.m., followed by a news conference with Mr. Powell at 2:30. A rate cut at this meeting is a little more than 20 percent priced into markets, based on data from the CME Group, and a move at the central bank’s July 31 meeting is at 85 percent. The Fed hasn’t cut rates since the end of 2008, when the Federal Open Market Committee slashed them to near zero in an effort to stoke growth in the depths of the Great Recession. Between late 2015 and the end of last year, officials gradually raised their policy interest rate nine times to help keep the strong economy from overheating.
The mere signal that a rate move is imminent would be a major shift in stance over the past six months. The Fed has not lowered rates since the end of 2008, when the Federal Open Market Committee cut them to zero in an effort to stoke growth in the depths of the Great Recession. From late 2015 to the end of last year, officials gradually raised their policy interest rate to help keep the strong economy from overheating. But Mr. Powell indicated early this year that the Fed was pivoting away from steady increases, adopting a patient stance instead as markets wobbled and growth showed signs of weakening. The federal funds rate is now at 2.25 to 2.5 percent, much lower than it has been in the later years of an economic expansion. That leaves the central bank with less room to cut rates come the next recession.
Mr. Powell indicated early this year that the Fed was shifting away from steadily lifting interest rates, adopting a patient stance instead as markets wobbled and growth showed signs of weakening. The federal funds rate is now at 2.25 to 2.5 percent, much lower than it has historically been in the later years of an economic expansion. Congress charges the Fed with maintaining the maximum level of employment consistent with slow and steady inflation, and the central bank targets 2 percent yearly price gains — a level low enough to ward off deflation, which encourages cash hoarding, yet not harmful to consumers. The Fed hasn’t hit that target since formally adopting it in 2012, and inflation expectations have recently shown signs of slipping.
Mr. Trump regularly argues that Mr. Powell, whom he chose to lead the Fed, made a mistake and lifted rates too many times last year. The president said last week that the central bank’s actions have put the United States at a disadvantage to China in the administration’s continuing trade spat, and on Tuesday tweeted that the European Central Bank’s turn toward added stimulus was “making it unfairly easier for them to compete against the USA” by weakening the euro against the dollar. But the Fed’s job in managing the economy has been complicated by Mr. Trump’s trade fights, including a tariff war with China that could either worsen or de-escalate later this month after the president meets with Chinese President Xi Jinping at the Group of 20 summit in Japan. The tensions have heightened uncertainty and may be weighing on business investment.
Political pressure creates a risk for the Fed, which operates independent of the White House. By lowering rates, officials could appear to be bending to Mr. Trump’s will, even if they are making the move for legitimate economic reasons. But that would be unlikely to deter the Fed from cutting rates if officials believed a move was warranted. Fed policymakers regularly say that they are focused on economic data and will make their decisions independent of the political atmosphere. The Fed noted in its statement on Wednesday that “indicators of business fixed investment have been soft,” and said that “inflation for items other than food and energy are running below 2 percent,” reflecting downgrades to the language it used to describe investment and inflation following the early May meeting.
A decision to lower rates soon would not necessarily be the start of a full-blown cutting cycle, the kind that happens when the economy is entering a recession and the Fed tries to dig it out. Against that worsening backdrop, officials indicated that they expected to cut rates next year, reducing the median Fed funds rate forecast to 2.1 percent for 2020.
While there are many risks on the horizon, most real economic data still looks decent: the unemployment rate is at its lowest in nearly 50 years, and the economy is on track to have expanded at an above 2 percent pace in the second quarter, based on incoming data. Activity is slowing down, but the Fed always expected some moderation as fiscal policy stimulus from tax cuts faded. Policymakers see rates returning to 2.4 percent in 2021 and hovering at 2.5 percent in the longer run, based on the median projection. That’s down from a longer-run expectation of 2.8 percent in March, suggesting the Fed would have even less room to cut rates in future recessions than previously thought.
Instead, these could be “insurance” rate cuts: moves taken pre-emptively to juice the economy just a little bit. The central bank took similar actions when risks threatened economic growth twice in the 1990s. Fed officials are working against a fraught political backdrop. The central bank is independent of the White House and Mr. Trump appointed Mr. Powell as its head, but the president regularly criticizes the central bank for lifting rates too many times last year. Mr. Trump ramped up those attacks this week, saying that Fed policy was putting the United States on an uneven playing field and hinting that he could consider the unprecedented move of attempting to demote Mr. Powell.
While many Wall Street economists expect such moves before the end of the year, some are not convinced a series of cuts is imminent. “They’re going to be making an announcement pretty soon, so we’ll see what happens,” Mr. Trump said, when asked by a reporter whether he would try to strip Mr. Powell of his chairmanship. “I want to be given a level playing field, and so far I haven’t been.”
“We think the hurdle for such cuts is likely to be higher than widely believed,” Jan Hatzius, the chief economist at Goldman Sachs, wrote in a note to clients. The Fed was able to resume rate hikes in the earlier episodes, but that might be harder now given pressure from the White House. “Overly hasty insurance cuts now might increase the risk that the funds rate gets stuck at too low a level if the economy remains resilient.” A Fed spokesperson noted that the chairman can only be removed “for cause.” Mr. Powell said in a “60 Minutes” interview earlier this year that “the law is clear that I have a four-year term. And I fully intend to serve it.”
There are risks to pushing rates too low at this point in the business cycle. The stock market reacts to hints of coming rate cuts with ebullience, and bond investors may react by seeking out ever-riskier investments that pay higher rates. Because the past three business cycles have died at the hands of bursting financial bubbles, such behavior worries Fed officials. Investors saw a slim chance of a rate cut in June. Before the meeting, they saw an 80 percent chance of a rate cut in July.
On the other hand, moving too slowly would come at a cost. Job market slowing usually comes when an economic cool-down is underway, so waiting to see proof of more pronounced weakness in hiring could mean waiting too long. The Fed slightly lowered its expectation for long-run sustainable unemployment to 4.2 percent, down from 4.3 percent in March. Officials also soured on inflation: The median one now sees a less-volatile price gauge closing out the year at 1.8 percent and 1.9 percent in 2020. The Fed had previously expected the gauge to hit its 2 percent target by the end of 2019.
Tepid inflation is another concern. Prices climbed just 1.5 percent in the year through April, data from the Commerce Department shows, well below the Fed’s 2 percent goal. While officials expect that shortfall to fade with time, they have not hit their inflation target consistently since they formally adopted it in 2012, and inflation expectations are now sinking lower. Until today, there had never been a dissent under Mr. Powell’s watch — the last time someone voted against a decision was December 2017 under Chairwoman Janet L. Yellen, when the Chicago Fed President Charles Evans and Minneapolis President Neel Kashkari would have preferred easier policy.
Consumer expectations for prices five to 10 years from now have dropped to record-low levels, based on preliminary June survey data from the University of Michigan. Weak expectations can create a self-fulfilling prophecy, weighing down real-world increases and preventing officials from achieving their targets.
But the difference between moving in June and July is a small one, economists and analysts say. Given the huge amount of data coming between the end of this week and the midsummer meeting, from news on trade to new jobs and inflation figures, they said it probably makes sense for the Fed to stay patient a little longer.
“The Fed will open the door to a rate cut, but it won’t quite walk through it,’’ said Gennadiy Goldberg, an interest rates strategist at TD Securities. “Given the recent data and lack of certainty on China, it does behoove them to wait for new information.”