Fed poised to give Trump boost with rate cut

Fed poised to give Trump boost with rate cut
© Greg Nash

The Federal Reserve is poised to cut interest rates on Wednesday, delivering President TrumpDonald John TrumpJulián Castro: It's time for House Democrats to 'do something' about Trump Warren: Congress is 'complicit' with Trump 'by failing to act' Sanders to join teachers, auto workers striking in Midwest MORE a long-sought boost to the economy.

Trump has pushed the Fed to loosen rates and stimulate the economy for more than a year, accusing the independent central bank of impeding his agenda and holding back growth.

The president has used his bully pulpit to exert unprecedented public pressure on the Fed and its chairman, Jerome Powell, who have remained defiant against his attempted political influence and dismissive of his attacks.

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Powell and the members of the Fed’s policymaking arm, the Federal Open Markets Committee (FOMC), will conclude their monthly two-day meeting on Wednesday and are expected to deliver the first rate cut since 2008 during the height of the financial crisis.

The Fed is now poised to give Trump the cheaper money he desires. But the move could also herald the start of a new challenging stretch for the economy, with the Fed acting in part because of the damage and uncertainty created by Trump's trade policies and a slowing global economy.

“FOMC members are attempting to offset damaging trade policy decisions that could hit us with a lag,” wrote Diane Swonk, chief economist at Grant Thornton, in a Monday research note.

“The Fed does not want to be blamed for the next recession.”

The expected cut highlights how the nation's economic outlook has soured amid slowing global growth, rising trade tensions and political risks that could derail almost a decade of uninterrupted recovery.

Last Friday, the Commerce Department released data showing a sharp decline in business investment that dragged economic growth down to 2.1 percent over the second quarter. 

Policymakers see growing threats to the record stretch of prosperity Trump inherited from President Obama. It's also a critical challenge for Trump, who has staked his reelection in 2020 on the strength of the economy and extending that boom. Trump has leaned heavily on the Fed to power the economy with cheap money, insisting he’s entitled to help from the independent central bank.

“I'm very disappointed in the Fed,” Trump told reporters Tuesday morning, blasting the bank for raising rates in 2018.

"The Fed moved, in my opinion, far too early and far too severely. It puts me at somewhat of a disadvantage,” Trump added. “Fortunately, I've made the economy so strong that nothing's going to stop us. But the Fed could have made it much easier."

A severe downturn in the U.S. appears well beyond the horizon, but the Fed is eyeing a rate cut as an insurance policy against the rising risks of global turmoil and Trump’s trade agenda.

While the labor market and consumer spending remain hot, long-term indicators like business investment and industrial activity have turned sour over the past three months. Economic threats are much more severe in the European Union and China, where central banks are preparing to ramp up stimulus to fend off looming recessions.

Managing those competing forces will be a test for the Fed.

“The weakness in business spending ... will justify their concerns that business confidence is struggling to overcome slow growth abroad and erratic U.S. trade policy,” wrote Tim Duy, a University of Oregon economics professor who closely tracks the Fed. “Brexit remains an open, festering wound ready to go gangrene. And the lull in the trade wars is almost certainly temporary.”

A Fed rate cut could help give businesses a push toward expanding and investing amid a stormy global forecast. But even as the Fed acts, another summit this week could have greater implications for the U.S. economy and Trump’s ability to manage it.

Officials from the Trump administration and China are meeting Tuesday and Wednesday in Shanghai to revive stalled negotiations to end their yearlong trade war. Trump’s tariffs on $250 billion in Chinese goods and Beijing’s retaliatory import taxes on U.S. farm products have taken a heavy toll on both nations.

Despite the mounting damage, Trump has denied the potential blowback from his trade agenda and insisted Tuesday that China must clear a high bar to strike a deal to end their battle.

“Our Economy has become MUCH larger than the Chinese Economy [in the] last 3 years,” Trump tweeted Tuesday. “We have all the cards, our past leaders never got it!”

The rate cut expected Wednesday is also likely to be smaller than Trump has sought.

And while the president can be expected to take a victory lap, there is no indication he will ease pressure on the Fed to do more, especially as the 2020 race heats up.

"The Fed has made all of the wrong moves," Trump tweeted on Monday. "A small rate cut is not enough, but we will win anyway!"