The Federal Reserve is getting ready to disappoint President Donald Trump. Again.
Fed policymakers on Wednesday are widely expected to cut interest rates for the third time since July. But positive headlines, largely driven by Trump’s preliminary trade deal with China, could lead the central bank to tap the brakes on any further decreases until there’s evidence that the economy really needs yet another boost.
Trump, who last week kept up his relentless attacks on the Fed by tweeting that it has been “way too fast to raise, and way too slow to cut!,” is leaning on the central bank to take bolder steps to stimulate growth as he heads into a bruising reelection campaign. It’s not going to happen, at least right now.
“Given that the economy is not in recession, and it’s unlikely to enter into recession, at some point the Fed is going to stop cutting rates,” said Gus Faucher, chief economist at PNC Financial. “And the president will not be happy about that.”
With the 2020 presidential race closing in, that means Trump’s biggest argument for reelection beyond his base — the strength of the economy — could be undercut by the reality that growth will, at best, be plugging along at the same pace as it was under his political nemesis, former President Barack Obama.
That dynamic could simply mean more angry tweets from the president, but he could escalate the standoff by reviving his threat to fire Fed Chair Jerome Powell.
“The way to get the Fed’s attention again means threatening to fire Powell, but he seems to have backed off of that,” said Sarah Binder, a political science professor at George Washington University. “He doesn’t really get any pickup from Republicans on the Hill.”
That could change if the economy begins to dramatically slow, particularly given Congress’s inability to enact new policy.
“It’s possible that the push for the economy comes from stepping back from some of these trade disputes,” Binder said. “I’m hard-pressed to see Republicans, given a divided Congress, doing any major stimulus, especially as the deficit gets over $1 trillion.”
“The way to do it might be through infrastructure, but no one seems to think that’s a serious possibility,” she added.
As the Fed aims to continue its policy of ignoring the president’s broadsides, the central bank faces a complicated picture. Still healthy consumer spending and a 50-year-low unemployment rate suggest the economy isn’t in dire need of intervention.
Indeed, market participants on Tuesday afternoon were nearly unanimous in predicting the Fed will lower rates on Wednesday — and almost 80 percent are then expecting the central bank to hold off on another cut in December, according to the CME FedWatch Tool.
But data show that manufacturing is contracting, businesses are more hesitant to invest in the face of trade tensions, and inflation has been stuck below the central bank’s 2 percent target, all of which make the case for lower rates.
Economists are widely predicting that new GDP data, set for release Wednesday morning, will show that the economy grew by less than 2 percent in the third quarter, and a Friday report on jobs numbers could be weak, particularly after a six-week strike by GM workers.
Still, a lot of the Fed’s worst fears about the outlook have simply not come to pass.
“We could’ve had a worsening of the trade war with China, which we didn’t, and we could’ve had a hard Brexit on Oct. 31, which we don’t,” said Diane Swonk, chief economist at Grant Thornton.
Swonk said that means the central bank could even hold off on a reduction this week and wait to cut rates later when the economy might need it more. “I am actually really worried about the economy next year, but I’d rather the Fed save its fire for when it has its biggest impact,” she said.
Holding off on a rate decrease could also have a side benefit for the central bank, Swonk said.
“They’re going to raise the president’s ire no matter what because they’re not going to cut enough for him, so that’s just background noise,” she said. “The added benefit of not cutting … it does underscore the Fed’s independence at a critical juncture.”
PNC’s Faucher said that while the worst-case scenario hasn’t materialized, “there is a substantial amount of risk out there,” particularly around the U.S.-China trade relationship, but also related to Britain’s exit from the European Union, that has still not gone away.
Fed leaders have sent few signals about their plans over the last few months, given the uncertainty over how the economic outlook might unfold. Powell has underscored that the central bank is trying to manage potential risks, even as he has suggested that lowering borrowing costs isn’t the ideal way to offset decreased growth as a result of trade uncertainty.
Making his effort at communicating the Fed’s intentions even more delicate is that members of the central bank’s rate-setting committee have increasingly diverse opinions on the right way forward.
Three of the 10 voting members dissented from the Fed’s cut in September, with two preferring to hold steady and one wanting to reduce rates by a larger amount.
“That’s part of the conundrum here,” Binder said. It’s possible “there’s no forward guidance to be given because they don’t know what they’re going to do in December.”
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October 30, 2019 at 04:06PM
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Fed risks more angry Trump tweets as pause in future rate cuts looms - POLITICO
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