Fed walks 2020 tightrope on rates
The Federal Reserve is facing another minefield of potential threats to a steady U.S. economy as the brief boost of optimism that ended 2019 quickly fades.
The Fed is expected to announce Wednesday that it will hold steady on interest rates for the second consecutive month after cutting borrowing costs three times last year.
After navigating a tumultuous year of recession fears and trade tensions, vindicated Fed officials hinted in December that they’ll likely leave rates unchanged through the start of 2020 as the economy remains solid. But keeping that course in an election year could be a challenge.
So far, there are few signs of major structural threats to the U.S. economy despite sluggish wage growth and a protracted manufacturing recession. But the emergence of several new economic headwinds could force the Fed into a tough position as it faces unprecedented political pressure ahead of the 2020 election.
President Trump is depending on a strong economy to ease his path to re-election and has consistently used the Fed as a scapegoat for any slip in the stock market or lackluster jobs report. Trump has demanded more aggressive rate cuts, and while the Fed has waived off those calls, experts say that relentless pressure from the president and a tenuous global economy could hinder the bank’s mission to foster stable prices and ample jobs.
“The Fed is in a uniquely uncomfortable position because the odds are very good that the economy will weaken as the year progresses and the markets will start to drop,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics.
Economic growth in the U.S. is expected to slow to between 1.8 and 2 percent of gross domestic product (GDP) in 2020. That pace is steady enough to support a growing labor market, but far below Trump’s promised minimum of 3 percent each year.
With unemployment at just 3.5 percent and consumer sentiment stable, the U.S. economy stands to be an asset to Trump as he seeks to win over swing voters. The president has frequently claimed that the strong job market and soaring stocks will collapse if he is replaced with a Democrat.
Even so, a brewing trade conflict with Europe, rising tensions in the Middle East, and the potential economic damage from the coronavirus all pose threats to an otherwise resilient U.S. economy.
In a Tuesday tweet shortly before the Fed’s first policy meeting of 2020 began, Trump renewed his longstanding demand for the bank to zero-out interest rates and pump crisis-level stimulus into a growing economy with unemployment at 50-year lows.
“The Fed should get smart & lower the Rate to make our interest competitive with other Countries which pay much lower even though we are, by far, the high standard,” Trump tweeted.
Slashing interest rates could also weaken the U.S. dollar, making American products relatively cheaper in foreign markets and potentially reducing Trump’s loathed trade deficit with China.
Trump is expected to ramp up pressure on the Fed to cut rates and help him secure reelection, but experts say it is unlikely the central bank will change direction under pressure after brushing off years of attacks.
“I do think that the last year and a half of getting all of Trump’s tweets … has probably prepared them pretty well for what’s coming up in the election,” said Ian Katz, director at policy research firm Capital Alpha Partners.
“They’re definitely going to take more heat, but I think by now they’re used to it and I don’t think it’s going to impact their decision making.”
Still, the Fed is also facing challenges of its own making, including the shortcomings of its response to the financial crisis and an effort to unload billions of dollars of bonds that has created turbulence in crucial interbank lending markets.
Fed Chairman Jerome Powell is not expected to make a significant update to the bank’s views on the appropriate level of interest rates during his Wednesday press conference. But Fed watchers will be paying close attention to Powell’s comments on efforts to support bank liquidity and how they could interfere with its main tools for guiding monetary policy.
And the impacts of Fed policy in an election year will be under even more scrutiny.
“There’s a real link between every time the Fed increases its portfolio, equity markets go up and rich Americans get richer,” Petrou said, urging the Fed to consider “how really unequal the lack of credit is making a lot of Americans.”
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