The world’s most powerful central bank is poised to cut its benchmark rate for the first time since 2008. The reasons couldn’t be more different.
Back then, the economy was in freefall after a spike in foreclosures deflated the value of bonds backed by home loans. This time, more than a decade later, Federal Reserve policymakers aren’t dealing with a financial crisis. They’re trying to keep the nation’s longest expansion from petering out.
The Fed’s policy-setting Federal Open Market Committee, or FOMC, has a two-day meeting that starts on Tuesday. On Wednesday at 2 p.m. it will issue a statement with its decision on whether to maintain or change its overnight lending rate, an important benchmark for financial markets.
Some easing, as a rate cut is called because it makes borrowing cheaper, is baked into market expectations, so the only major reaction from investors will be if the Fed doesn’t take any action. The Fed’s decisions impact the nation’s mortgage and housing markets because they influence the outlook of investors in mortgage-backed securities, or MBS, who ultimately set home-loan rates.
“We think it’s more likely than not we’ll see a cut at the July meeting,” said Robert Deitz, chief economist of the National Association of Home Builders. “The fact that the economy slowed, as it has from last year, is usually a signal that interest rates are going to come down."
Most investors are expecting a quarter-percentage-point reduction, based on the FedWatch tool maintained by CME Group, the global derivatives marketplace in Chicago. Traders in futures markets have signaled a 74% probability of a quarter-percentage-point cut and a 26% chance of a half-percentage-point cut.
While a quarter-percentage-point cut would seem to meet the expectations of investors, it wouldn’t satisfy a certain resident of 1600 Pennsylvania Avenue in Washington D.C., based on Monday morning tweets.
"The Fed has made all of the wrong moves. A small rate cut is not enough, but we will win anyway!" President Donald Trump said on Twitter.
U.S. presidents traditionally refrain from out-loud criticism of the Fed to avoid spooking markets and eroding the Fed’s credibility, which might influence its ability to set monetary policy. Trump hasn’t shown the slightest compunction about criticizing the Fed in public comments and on Twitter, even going as far as to mock Fed Chairman Jerome Powell.
“Nobody ever heard of him before, and now, I made him, and he wants to show how tough he is,” the president said about Powell during an interview on Fox Business News last month, comparing the Fed chairman to a “stubborn child.”
The Fed has raised rates nine times since late 2015 but paused at the beginning of 2019 as the economic expansion showed signs of slowing. In addition, central bankers including the Fed chairman cited concerns about escalating trade tensions as the president ratcheted up his trade wars with China and other countries.
Powell first signaled in a June speech that he was leaning toward supporting a rate cut, and he put the blame firmly on trade-war worries.
“We do not know how or when these trade issues will be resolved,” Powell said. “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, will act as appropriate to sustain the expansion.”