Fed poised to cut rates as Trump keeps up pressure
The Federal Reserve is likely to cut interest rates this week, a move that comes amid growing pressure from President Trump and new uncertainties about the global economy.
The Fed is expected to announce Wednesday that it will cut its baseline interest rate for the second consecutive meeting. After cutting rates in July for the first time since 2008 during the recession, the Fed is almost certain to nudge down borrowing costs to counter rising fears of a global recession and slowing U.S. job growth.
But while lower interest rates may relieve some pressure on the U.S. economy, a moderate cut will likely do little to appease Trump as he scrambles to regain leverage in his trade war with China.
Trump has long complained about the Fed’s refusal to tilt trade talks with China in his favor by boosting the economy and cheapening the dollar with lower interest rates. Federal Reserve Chairman Jerome Powell and other Fed officials have disavowed any pressure to stray from their legal charter to remain politcally neutral and fight Trump’s trade battles.
As Trump struggles to strike an elusive deal with China before the 2020 election, a slim rate cut risks intensifying the president’s challenge to the Fed’s independence.
“The United States, because of the Federal Reserve, is paying a MUCH higher Interest Rate than other competing countries,” Trump tweeted Monday.
“They can’t believe how lucky they are that Jay Powell & the Fed don’t have a clue.”
Trump’s battle with China has created a series of daunting political and economic obstacles for the Fed as it seeks to extend a record-long stretch of U.S. growth.
Powell faces a difficult balancing act and divisions within his own central bank. Minutes from the bank’s last meeting showed that while some policymakers favored deeper cuts, others backed no rate cuts.
U.S. economic and job growth have slowed throughout 2019 amid a manufacturing recession and decline in business investment driven in part by Trump’s trade battle with China and the European Union. There are also new potential shocks to the economy following an attack on Saudi oil fields that could affect as much as 5 percent of the world’s total daily crude oil production.
Though the U.S. still boasts unemployment near record lows and strong consumer spending, the Fed has sought to lower interest rates as a hedge against a dour economic outlook.
“I would not see a recession as the most likely outcome for the United States or the global economy,” Powell said earlier this month at speech in Zurich. Even so, the chairman added that the Fed “would act as appropriate to sustain the expansion,” renewing a pledge the bank made ahead of its July rate cut.
Trump’s ongoing effort to enlist the Fed in his trade war with China has plunged the apolitical bank into a fight with severe implications for the 2020 election.
Trump has repeatedly pressured the Fed to boost U.S. exports with lower rates, mocking top officials and even questioning Powell’s patriotism after the chairman asserted in August that “setting trade policy is the business of Congress and the administration, not that of the Fed.”
“The Fed tends to avoid large rate cuts unless either the data is clearly falling off the cliff or credit markets are seizing up. Neither is currently the case,” wrote Tim Duy, a professor at the University of Oregon who closely tracks the Fed, in a research note last week.
“Instead, the Fed will take a more cautious approach to policy, pushing down rates in quarter point increments.”
That slow and steady pace is likely to irk Trump, who has raged against the Fed for not matching the near-negative rates of nations at the other end of his trade disputes. Trump last week in a tweet called for interest rates of “zero, or less.”
But even if the Fed follows through with a widely projected 0.25 percentage point rate cut, U.S. borrowing costs will still be well above those in Europe, where interest rates have dropped to sub-zero levels.
Relatively higher U.S. interest rates reflect the relative strength of the American economy compared to global powers in Europe and Asia, which face more immediate threats. But higher U.S. borrowing costs have helped keep the U.S. dollar strong, which makes U.S. exports relatively more expensive in foreign markets.
The Fed’s decision also comes as trade talks with China appear to have again deadlocked.
Though the U.S. and Beijing have exchanged several gestures of goodwill over the past week, both nations remain far from a deal that could make or break Trump’s election.
Chinese leaders have signaled they are willing to wait out lagging economic growth and retaliatory tariffs rather than give in to Trump in the near term.
That’s only brought more pressure on the Fed from Trump.
“Will Fed ever get into the game? Dollar strongest EVER! Really bad for exports,” Trump tweeted Monday.
The Fed may also face the wrath of Trump if the bank fails to appease Wall Street’s expectations of cheaper borrowing costs. Michael Arone, chief investment strategist for State Street Global Advisors, warned Monday that the stock market has bet on further rate cuts this year and may buckle if Powell doesn’t uphold that view in a Wednesday press conference.
Wall Street’s reaction will also be closely watched.
“Investors have priced in a greater number of interest rate cuts that the Fed might not commit to yet,” Arone said.
“The real risk to the market is that the Fed doesn’t deliver on those expectations.”