October 19, 2019

The Fed Is Poised to Cut Rates Again. Here’s What to Watch.

The Fed Is Poised to Cut Rates Again. Here’s What to Watch.


WASHINGTON — Federal Reserve officials are expected to cut interest rates for a second time on Wednesday, a move that could prove divisive among Fed officials and aggravate President Trump’s anger toward the central bank.

The Fed’s rate decision, which will be announced at 2 p.m. in Washington, will be accompanied by a fresh set of quarterly economic projections and followed by a news conference at 2:30 p.m. with the chair Jerome H. Powell.

That means markets will have plenty of information to digest as they try to game out what comes next for the Fed, which lowered its policy interest rate by a quarter point for the first time in more than a decade in July as officials tried to protect the economy against uncertainty created by Mr. Trump’s trade war and a global economic slowdown.

Mr. Trump has been pushing for an extensive cut, one that leaves rates at or below zero, but investors anticipate another quarter-point move — setting rates in a range of 1.75 to 2 percent. Here’s what else to watch out for.

The Fed will release an updated version of its postmeeting statement Wednesday, and economists are looking for any changes to the language that could provide clues about whether officials are becoming more or less concerned with the economic outlook.

Perhaps more crucially, the Fed’s 17 participants will publish new economic projections at this meeting, giving an updated snapshot of where the group believes growth is headed and whether officials believe the Fed might need to provide additional support.

“The most important question” coming out of this meeting, according to Goldman Sachs economists, “is how many participants will project additional rate cuts.”

The last set of Fed funds rate projections — commonly referred to as the “dot plot” because it depicts rate expectations as blue dots on a graph-paper background — showed that as of June, not one policymaker expected more than two rate cuts by the end of 2019.

But risks have mounted since then, putting the Fed under increasing pressure to help keep America’s record-long economic expansion going.

Mr. Trump ramped up his trade war with China immediately after the Fed’s rate cut in July.

While China and the United States plan to resume talks next month, a resolution is hardly assured and the global economy continues to wobble. Manufacturing data has been deteriorating globally, job growth in the United States is decent but moderating, Britain’s smooth exit from the European Union is still a question mark and airstrikes on Saudi oil facilities could heighten geopolitical tensions.

Will it be enough to tip some officials in favor of future rate cuts? Probably, based on their public remarks. James Bullard, the president of the Federal Reserve Bank of St. Louis, suggested in a recent interview with Reuters that he would favor a half-point rate cut — the equivalent of a third cut, for dot-plot purposes.

But not everyone is expected to agree with even a moderate cut. Esther George and Eric Rosengren, who are also voting members of the rate-setting Federal Open Market Committee, have been less enthusiastic about getting ahead of risks before they turn into economic reality. They dissented against the July rate cut and could do so again at this meeting.

When it comes to the data, things actually look pretty good. At 3.7 percent, unemployment is hovering near a 50-year low. Overall growth has held up, and consumers are still spending strongly, though the University of Michigan survey suggests that they are becoming less confident as the trade war spooks many.

Inflation is still stuck below the Fed’s target of 2 percent — as it has almost been pretty regularly since the central bank formally adopted that goal in 2012 — but it has been showing signs of creeping back up.

The Fed will release new projections for growth, joblessness and price gains through 2022, and those could offer insight into what officials are expecting. They previously forecast that the unemployment and inflation rates would climb slightly in the coming years while growth moderated.

Perhaps the biggest wild card at this meeting is Mr. Powell’s news conference. The Fed chair roiled markets after the July meeting because investors interpreted his statement that the Fed’s rate cut was a “mid-cycle adjustment” as a sign that the central bank did not plan to aggressively cut borrowing costs.

Mr. Powell has little to gain by making definitive promises: Trade policies are one of the major risks on the horizon, and they have the potential to change quickly. The Fed could face very different conditions by its Oct. 29-30 meeting, which comes after United States and Chinese officials are scheduled to meet.

“We think Powell will steer clear from the phrase mid-cycle adjustment that caused waves in July, favoring instead an open-minded recalibration of rates,” economists at Evercore ISI wrote in a research note previewing the meeting.

Whatever Mr. Powell says seems likely to draw a reaction from the White House. While Mr. Trump has no ability to directly influence Fed policy — the central bank is insulated from politics and answers to Congress, not the White House — he has made a habit of weighing in on its decisions.

Mr. Trump has ramped up his attacks on Twitter in recent months, figuratively calling Mr. Powell a bad golfer, labeling him an enemy and saying that he and his colleagues are “boneheads.” He has even suggested that the Fed should adopt negative rates, a policy intact in the eurozone and Japan, which have very low inflation and more fragile economies.

You might also hear the phrase “standing repo facility” bandied about around 2 p.m.

A little background: There has been some turmoil in the money markets this week as a corporate tax due date and Treasury bond issuance combined to fuel a cash shortage. That creates problems for the Fed — it makes it harder for it to keep its policy rate under control, and risks tightening financial conditions in ways that slow down borrowing and spending.

As a result, some economists believe the Fed will discuss ways to keep those markets chugging along smoothly — while also steadying the Fed funds rate — at their meeting. Analysts think options might include a technical tweak to the Fed’s rate-setting tool, a resumption of bond-buying that will keep the Fed’s balance sheet growing alongside the economy to guard against future cash crunches in money markets, and a standing repo facility.

“Repo” is short for Treasury repurchase agreements, short-term loans taken out overnight by financial institutions like hedge funds and banks. The “standing facility” refers to a regular Fed program that allows banks to convert Treasury securities into reserves — money holdings at the central bank — on demand, at a rate the Fed sets.

In theory, such a tool would keep reserves, which banks sometimes prefer to hold for regulatory reasons, from becoming scarce. That would help money markets function better at times of stress, because banks would be less likely to hoard their reserves. As a result, it would keep the Fed from having to step in to cool things down. The central bank had to do so twice this week, a first since the financial crisis.

It is not clear whether the Fed is going to make any big changes at this meeting. Its officials tend to be a contemplative bunch, and they have not foreshadowed a shake-up. But market conditions could drive the institution’s hand, so it is worth watching for moves in that direction.

“I had been skeptical that they were going to introduce a standing repo facility — I think now the probability on that has gone up,” said Seth Carpenter, chief United States economist at UBS.





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