The Fed is expected to cut rates again amid conflicting economic signals

President Donald Trump and Jerome Powell (Photo: MICHAEL REYNOLDS, EPA-EFE)

Although Powell told reporters in July the economy has performed well, he cited risks posed by President Trump’s trade war with China, sluggish global growth and stubbornly low inflation.

As a result, U.S. consumer spending remains healthy but manufacturing and business investment have been weak. Fed policymakers want to avoid a recession because interest rates are still historically low, leaving officials little room to cut in a downturn.

Falling stocks, rising oil prices: Why the Dow fell and oil prices surged Monday

A return to $100 a barrel crude?: Analysis: Is it impossible that oil prices reach $100 a barrel? No.

Yet a core measure of the consumer price index that excludes volatile food and energy costs rose 2.4% annually in August, its strongest reading since July 2018, the Labor Department said last week. Wage growth also surged last month. And the U.S. and China agreed to resume trade talks in October. That prompted China to announce that it will remove tariffs from U.S. pork and soybean imports while the U.S. delayed a tariff increase on $250 billion in Chinese imports.  

Meanwhile, retail sales beat expectations in August, building on a strong showing the prior month. Consumer spending makes up about 70% of economic activity.

At the same time, the economy is flashing some worrisome signs. First, hopes for a resolution of the trade war have been raised and dashed several times in recent months. The reality is the U.S. has slapped tariffs on more than $350 billion of Chinese imports with duties on another $200 billion set to take effect in mid-December.

Also, job growth has slowed noticeably and an index of manufacturing activity revealed contraction in August for the first time since 2016.

The split-screen economic signals mean the Fed will likely continue to be fractured this week, says Diane Swonk, chief economist at Grant Thornton. In July, eight Fed policymakers said they think there should be no rate decreases this year while seven favored two quarter-point cuts. In the end, two of 10 voting policymakers dissented from the Fed’s decision.

Powell also must endure continued taunts from Trump, who has called for sharper rate cuts and even negative interest rates to help the U.S. keep pace with Europe.But with easing trade tensions and somewhat stronger inflation, the odds of a half percentage point cut Wednesday are “quite low,” Feroli says.

Whatever the Fed decides, “The president will no doubt complain, but that has become par for the course,” Swonk says.

Source