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What to Watch Ahead of the Fed Meeting A Preview of the Fed Meeting
(about 8 hours later)
The Federal Reserve is almost universally expected to cut interest rates when its meeting wraps up on Wednesday, the first reduction since officials slashed them to near zero in 2008, during the dark days of the financial crisis.The Federal Reserve is almost universally expected to cut interest rates when its meeting wraps up on Wednesday, the first reduction since officials slashed them to near zero in 2008, during the dark days of the financial crisis.
It’s a turning point, and a precautionary one. Uncertainty stirred up by President Trump’s trade war and slowing global growth threaten the economic outlook, even though the domestic job market is strong and consumers are spending.It’s a turning point, and a precautionary one. Uncertainty stirred up by President Trump’s trade war and slowing global growth threaten the economic outlook, even though the domestic job market is strong and consumers are spending.
The Fed is eager to fend off a slowdown at a time when inflation is subdued and interest rates remain historically low, leaving the central bank with limited ammunition to bolster the economy should it fall into recession.The Fed is eager to fend off a slowdown at a time when inflation is subdued and interest rates remain historically low, leaving the central bank with limited ammunition to bolster the economy should it fall into recession.
Jerome H. Powell, the Fed chair, will have a chance to explain the decision — and offer guidance about what comes next — at his 2:30 p.m. news conference following the 2 p.m. announcement of the decision. Here’s what to watch.Jerome H. Powell, the Fed chair, will have a chance to explain the decision — and offer guidance about what comes next — at his 2:30 p.m. news conference following the 2 p.m. announcement of the decision. Here’s what to watch.
Most investors expect the Fed to make a quarter-point rate cut at this meeting. But it’s possible that officials could opt for something more dramatic: In 2007, for instance, the Fed slashed rates by a half point as it tried to get ahead of slowing growth.Most investors expect the Fed to make a quarter-point rate cut at this meeting. But it’s possible that officials could opt for something more dramatic: In 2007, for instance, the Fed slashed rates by a half point as it tried to get ahead of slowing growth.
Back then, most economic indicators were holding up, but financial conditions were tightening and the housing market had sharply decelerated. This time around, the Fed’s hints that one or more rate cuts are coming have been enough to keep credit easily available.Back then, most economic indicators were holding up, but financial conditions were tightening and the housing market had sharply decelerated. This time around, the Fed’s hints that one or more rate cuts are coming have been enough to keep credit easily available.
Half-point cuts are appropriate “when time is of the essence, namely, in financial crises or if you’re behind the ball on economic data,” said Michael Feroli, the chief United States economist at J.P. Morgan. “Neither of those two situations seem to be the case right now.”Half-point cuts are appropriate “when time is of the essence, namely, in financial crises or if you’re behind the ball on economic data,” said Michael Feroli, the chief United States economist at J.P. Morgan. “Neither of those two situations seem to be the case right now.”
When investors interpreted a speech by John C. Williams, the president of the Federal Reserve Bank of New York, as a sign that the Fed might cut by a half point, his bank took the unusual step of clarifying that his comments were not meant as a policy signal. Many Fed watchers see that pushback as a hint that July’s move is likely to be small.When investors interpreted a speech by John C. Williams, the president of the Federal Reserve Bank of New York, as a sign that the Fed might cut by a half point, his bank took the unusual step of clarifying that his comments were not meant as a policy signal. Many Fed watchers see that pushback as a hint that July’s move is likely to be small.
But that leads to another question: Will the Fed cut rates again this year? Markets think so.But that leads to another question: Will the Fed cut rates again this year? Markets think so.
Mr. Powell will have a chance to clarify what’s driving a cut — and his comments will help shed light on whether it will stand alone or if the Fed is sufficiently worried to consider additional moves down the road.Mr. Powell will have a chance to clarify what’s driving a cut — and his comments will help shed light on whether it will stand alone or if the Fed is sufficiently worried to consider additional moves down the road.
It could be the case that the Fed got spooked in late May and early June, as Mr. Trump threatened to slap tariffs on Mexico over immigration issues, markets gyrated and job gains staged a short-lived slowdown. Officials laid the groundwork for a coming cut at their June policy meeting, and now they may have to follow through even though trade tensions have eased somewhat, stock indexes are again tracing record highs and the job market added an impressive 224,000 positions last month.It could be the case that the Fed got spooked in late May and early June, as Mr. Trump threatened to slap tariffs on Mexico over immigration issues, markets gyrated and job gains staged a short-lived slowdown. Officials laid the groundwork for a coming cut at their June policy meeting, and now they may have to follow through even though trade tensions have eased somewhat, stock indexes are again tracing record highs and the job market added an impressive 224,000 positions last month.
If a July rate cut is merely a confirmation of previous messaging, it’s not clear that there will be another one.If a July rate cut is merely a confirmation of previous messaging, it’s not clear that there will be another one.
Alternately, the Fed might be vaccinating the economy against risks it judges as real and continuing, based on the pullback in global manufacturing, weak inflation and signs of bond market skittishness. If those forward-looking signals are guiding policymakers, another cut could look prudent — even if most domestic economic numbers hold up.Alternately, the Fed might be vaccinating the economy against risks it judges as real and continuing, based on the pullback in global manufacturing, weak inflation and signs of bond market skittishness. If those forward-looking signals are guiding policymakers, another cut could look prudent — even if most domestic economic numbers hold up.
Mr. Powell could duck the question of what happens next, buying himself and the committee more wiggle room.Mr. Powell could duck the question of what happens next, buying himself and the committee more wiggle room.
The president has been pushing the Fed to cut rates, and he’s unlikely to be satisfied with one small adjustment, based on his comments this week. On Tuesday, Mr. Trump said he wanted a “large” cut and again accused the Fed of stifling the economy with its 2018 rate increases.The president has been pushing the Fed to cut rates, and he’s unlikely to be satisfied with one small adjustment, based on his comments this week. On Tuesday, Mr. Trump said he wanted a “large” cut and again accused the Fed of stifling the economy with its 2018 rate increases.
Mr. Trump cannot control the independent central bank, but the White House, in breaking with a hands-off tradition and calling for a move, has created an optics problem for the Fed.Mr. Trump cannot control the independent central bank, but the White House, in breaking with a hands-off tradition and calling for a move, has created an optics problem for the Fed.
Even if officials cut rates for purely technocratic reasons, some onlookers will suspect that they have caved under pressure. The Fed prizes its freedom from politics, because monetary policy works best when its stewards are free to make choices that will lead to long-run economic success, rather than serving short-run partisan interests.Even if officials cut rates for purely technocratic reasons, some onlookers will suspect that they have caved under pressure. The Fed prizes its freedom from politics, because monetary policy works best when its stewards are free to make choices that will lead to long-run economic success, rather than serving short-run partisan interests.
A few key lines in the Fed’s post-meeting statement will be worth watching. The Fed will not release fresh economic projections until its September meeting, so how it characterizes the economy will offer insight into how the full committee views the current situation.A few key lines in the Fed’s post-meeting statement will be worth watching. The Fed will not release fresh economic projections until its September meeting, so how it characterizes the economy will offer insight into how the full committee views the current situation.
Mr. Powell may be their leader, but all five Fed governors and five of the 12 regional presidents have equal votes on monetary policy, so the range of opinions matters.Mr. Powell may be their leader, but all five Fed governors and five of the 12 regional presidents have equal votes on monetary policy, so the range of opinions matters.
In their last statement, officials said that while growth was likely to hold up, “uncertainties about this outlook have increased.” In light of “uncertainties and muted inflation pressures, the committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,” the statement said.In their last statement, officials said that while growth was likely to hold up, “uncertainties about this outlook have increased.” In light of “uncertainties and muted inflation pressures, the committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion,” the statement said.
Those were clues that a cut was coming soon. Central bankers could reiterate those views or ditch them if they want to send a signal about the future.Those were clues that a cut was coming soon. Central bankers could reiterate those views or ditch them if they want to send a signal about the future.
It’s also important to keep an eye on dissenting votes. It is possible that Eric Rosengren, the president of the Fed’s Boston branch, will vote against a move to lower rates. That would be the second no vote of Mr. Powell’s tenure, and the first in favor of higher rates. Some Fed watchers think that Esther George, the Kansas City Fed president, could also dissent in favor of keeping rates steady.It’s also important to keep an eye on dissenting votes. It is possible that Eric Rosengren, the president of the Fed’s Boston branch, will vote against a move to lower rates. That would be the second no vote of Mr. Powell’s tenure, and the first in favor of higher rates. Some Fed watchers think that Esther George, the Kansas City Fed president, could also dissent in favor of keeping rates steady.
Finally, the Fed could use its statement to offer up a new plan for how it will deal with its massive bond holdings. Policymakers have been shrinking their balance sheet, which grew as the Fed bought government-backed securities to bolster the economy in and after the recession. That unwinding, which is probably slowing the economy slightly by driving some interest rates higher, is scheduled to end in September. It’s possible that officials would stop the process early, so their policy is uniformly pointed toward bolstering growth.Finally, the Fed could use its statement to offer up a new plan for how it will deal with its massive bond holdings. Policymakers have been shrinking their balance sheet, which grew as the Fed bought government-backed securities to bolster the economy in and after the recession. That unwinding, which is probably slowing the economy slightly by driving some interest rates higher, is scheduled to end in September. It’s possible that officials would stop the process early, so their policy is uniformly pointed toward bolstering growth.
If you’re looking for a quiet signal about whether another cut is possible, pay attention to whether policymakers fixate on America’s inflation shortfall in their statement or if Mr. Powell does during his news conference. Officials have increasingly worried about stubbornly weak price gains, and while Mr. Powell has said he expects inflation to gradually rise, progress has been slow.If you’re looking for a quiet signal about whether another cut is possible, pay attention to whether policymakers fixate on America’s inflation shortfall in their statement or if Mr. Powell does during his news conference. Officials have increasingly worried about stubbornly weak price gains, and while Mr. Powell has said he expects inflation to gradually rise, progress has been slow.
The Fed formally adopted a 2 percent goal in 2012, and has since failed to sustainably achieve it. The central bank’s preferred inflation gauge rose just 1.6 percent in the year through June. Charles L. Evans, the president of the Federal Reserve Bank of Chicago, said on July 16 that he would be comfortable with a “couple” of cuts this year “on the basis of inflation alone.”The Fed formally adopted a 2 percent goal in 2012, and has since failed to sustainably achieve it. The central bank’s preferred inflation gauge rose just 1.6 percent in the year through June. Charles L. Evans, the president of the Federal Reserve Bank of Chicago, said on July 16 that he would be comfortable with a “couple” of cuts this year “on the basis of inflation alone.”
“Even now, the best forward-looking measures of inflation are closer to one and a half” percent, Janet L. Yellen, the former Fed chair, said in Aspen, Colo., on Sunday. “And it looks like inflation expectations are slipping. And that’s dangerous, because inflation expectations play a role in the prices that firms actually set.”“Even now, the best forward-looking measures of inflation are closer to one and a half” percent, Janet L. Yellen, the former Fed chair, said in Aspen, Colo., on Sunday. “And it looks like inflation expectations are slipping. And that’s dangerous, because inflation expectations play a role in the prices that firms actually set.”
Dangerous may seem like an extreme word — who doesn’t like low prices? — but inflation is grease on the wheels of a healthy economy. It gives companies a little headroom to raise wages, and it lifts interest rates, leaving the Fed with more room to cut them in a downturn.Dangerous may seem like an extreme word — who doesn’t like low prices? — but inflation is grease on the wheels of a healthy economy. It gives companies a little headroom to raise wages, and it lifts interest rates, leaving the Fed with more room to cut them in a downturn.
Expectations of a rate cut have already invigorated markets, pushing the S&P 500 stock index to new highs. What happens to stocks on Wednesday will largely hinge on future guidance: If the Fed signals that more easing might come, asset prices might soar. If it hints that it will be cautious when spiking the proverbial punch bowl, the response may be less ecstatic.Expectations of a rate cut have already invigorated markets, pushing the S&P 500 stock index to new highs. What happens to stocks on Wednesday will largely hinge on future guidance: If the Fed signals that more easing might come, asset prices might soar. If it hints that it will be cautious when spiking the proverbial punch bowl, the response may be less ecstatic.
Likewise, mortgage rates have already fallen on anticipation of a rate cut. The Fed’s signaling could determine how they evolve. Credit card rates could decline over time, as well, but they are influenced by other factors — including credit scores — and do not track as directly with the Fed’s rate.Likewise, mortgage rates have already fallen on anticipation of a rate cut. The Fed’s signaling could determine how they evolve. Credit card rates could decline over time, as well, but they are influenced by other factors — including credit scores — and do not track as directly with the Fed’s rate.
Ultimately, any move itself is likely to be small, so how it ultimately guides the economy might prove to be the bigger deal.Ultimately, any move itself is likely to be small, so how it ultimately guides the economy might prove to be the bigger deal.
“If cutting rates once or twice helps grease the skids a little bit to keep the expansion going, that’s going to be good for everybody,” said Greg McBride, the chief financial analyst at Bankrate.com. The risk of cutting rates is if it “signals the economy is in trouble, or it’s inflating the next asset bubble.”“If cutting rates once or twice helps grease the skids a little bit to keep the expansion going, that’s going to be good for everybody,” said Greg McBride, the chief financial analyst at Bankrate.com. The risk of cutting rates is if it “signals the economy is in trouble, or it’s inflating the next asset bubble.”
From the Wall Street Journal editorial page to Twitter, critics have been denouncing the Fed’s anticipated move as unneeded and even dangerous. Their logic is that the economy is still growing solidly, global risks have yet to clearly weigh on United States economic data, and markets are partying. While the risk of stoking runaway inflation looks remote, low rates could fuel risk-taking, particularly among financial firms.From the Wall Street Journal editorial page to Twitter, critics have been denouncing the Fed’s anticipated move as unneeded and even dangerous. Their logic is that the economy is still growing solidly, global risks have yet to clearly weigh on United States economic data, and markets are partying. While the risk of stoking runaway inflation looks remote, low rates could fuel risk-taking, particularly among financial firms.
Practically, it is unlikely that one tiny rate cut would be enough to either avert economic crisis or send markets careening toward a cliff. But the back-and-forth shows that the coming move could mark an important change in posture — one that has people on high alert.Practically, it is unlikely that one tiny rate cut would be enough to either avert economic crisis or send markets careening toward a cliff. But the back-and-forth shows that the coming move could mark an important change in posture — one that has people on high alert.