Federal Reserve policymakers are meeting in Washington amid widespread expectations that they will decide to cut interest rates for the first time since the financial crisis, and since Jay Powell began his tenure at the helm of the US central bank.
Here are five things to watch on Wednesday when the Fed issues its statement and Mr Powell holds his press conference.
The Fed will almost certainly deliver the 25 basis point cut in its main interest rate that it has been eyeing for some time, bringing it down to a target range of 2-2.25 per cent. Some economists and investors had suggested that the US central bank might aim for a bigger cut of 50bp out of the gates, but that seems unlikely.
Minutes from last month’s Federal Open Market Committee meeting indicated that many Fed officials saw a stronger case for “somewhat more accommodative policy” — suggesting a more cautious first move. Any other scenario — of a larger cut or no cut at all — would be a huge surprise.
Michael Feroli, a US economist at JPMorgan, said one of the reasons he thought the Fed would move by 25bp was that the economic outlook was not dire enough to warrant a bigger cut.
“In past episodes the Fed only initiated an easing with a 50bp move when there was a financial crisis or when the Fed was behind the curve and the economy was already showing signs of distress. Neither of those conditions hold today”
Assuming a 25bp cut is sealed, the biggest question is to what extent Fed officials will signal their intent to continue easing monetary policy in the coming months. That guidance may not come in the FOMC statement, which could continue to repeat that it will “act as appropriate to sustain the expansion”. But it could well come in Mr Powell’s post-meeting remarks.
The Fed chairman has been stressing many of the risks to the US outlook in recent public appearances, but if he reverts to emphasising the central bank’s reliance on hard data, it may signal that the central bank is not yet convinced of the need for a full cycle of deeper cuts.
“We expect [Mr Powell] to preserve optionality in his response, not committing the Committee to specific actions, though he will probably reiterate that a resolution of the various uncertainties buffeting the outlook, with trade policy being a key one, could lessen downside risks and limit the need for further easing”, Deutsche Bank’s US economists wrote in a note last week.
One point of uncertainty is whether the Fed will announce that it intends to stop shrinking its balance sheet this month, instead of in September, which would solidify its dovish stance.
Mr Powell suffered the first dissent of his tenure as Fed chair last month when James Bullard, the president of the Saint Louis Fed, voted against the decision to keep rates steady, arguing that a 25bp cut had already been needed at the time. To the extent that there is displeasure with the Fed’s move on Wednesday, it is likely to come from the opposite side.
Dissent could come from Esther George of the Kansas City Fed or Eric Rosengren of the Boston Fed, who have suggested the threshold for monetary easing has not yet been met.
Mr Powell could live with some dissent. But he will want to avoid a spirited debate turning into persistently open disagreement, which could be unsettling for the central bank at a time when it is already facing harsh criticism from Donald Trump.
Mr Powell will have some explaining to do. Although investors started betting on an interest rate cut a few months ago, many economists are not sure that the data justifies monetary easing at this stage.
The Fed chairman and other officials have laid out the case for the rate cut in some detail heading into the meeting, including a speech in Paris during which Mr Powell discussed the “interconnectedness” of the US economy with the rest of the world. It is very likely that the Fed chairman will stress weakness around the world — with the IMF cutting its global growth forecast earlier this year — and how that has factored in the decision.
Mr Powell will probably also place a large emphasis on below-target inflation and weakness in investment, which has overshadowed consumer strength. The Fed chair’s ability to make a convincing case for the rate cut will help to fight any notion that the central bank is simply caving in to Donald Trump’s persistent requests for aggressive monetary easing.
The first verdict on Mr Powell’s big move will come from markets, and the bar to impress is high. Traders are currently pricing in three more rate cuts over the next year, after the 25bp reduction this week.
Should the Fed fail to signal clearly its willingness to ease monetary policy in line with market expectations, investors will be quick to show their disappointment — a lesson outgoing European Central Bank president Mario Draghi learnt last week when he underwhelmed with scant details about when and how aggressively the central bank he helms will provide more stimulus.
Even a larger, more aggressive 50bp point cut, which several Fed officials have recently jockeyed for, could cause consternation. If unaccompanied by a pledge for additional accommodation, investors who believe the US economy needs more than a one-and-done cut in order to stave off a recession or revive inflation are likely to balk. Mr Trump is among those who would like to see a “large cut”, as he described it on Tuesday.
In recent days, Mr Powell has gotten backing from his predecessor, Janet Yellen. “I think in light of the risks, I would be inclined to cut a bit,” she said. “I wouldn’t see this as the beginning, unless things change, of a major easing cycle. But I do think it’s appropriate.”