US Fed faces balancing act in delivering rate cut

WASHINGTON —  The Federal Reserve is widely expected to announce its third interest rate cut of the year on Wednesday, another move to help bolster a softening American economy.

But where will it go from there? Markets will be watching intensely for clues, leaving to central bank chief Jerome Powell the delicate task of managing investor expectations.

The Fed is due to announce its decision at 1800 GMT, and Powell is scheduled to hold a news conference 30 minutes later.

President Donald Trump on Tuesday resumed his regular schedule of bashing the central bank on Twitter, saying it “doesn’t have a clue!”

“We have unlimited potential, only held back by the Federal Reserve.”

But the president’s demands notwithstanding, some influential voices are calling for a pause in the stimulus so the Fed can assess global economic and trade developments which may improve.

The US and China say they have reached another truce in the trade war while a no-deal Brexit now appears less likely.

But those developments could just as easily turn sour and economic data in recent weeks have sent more worrying signals, which means Powell will have to balance whether to signal a pause in rate cuts or hint that the central bank will continue the easing cycle.

“Unfortunately, I think clear communication by Jay Powell to the markets has been a bit of a challenge for him, particularly when he speaks extemporaneously or off the cuff,” Kathy Bostjancic, chief US financial economist at Oxford Economics, told AFP.

The Fed chairman has struggled on prior occasions to send clear-but-nuanced signals. 

He declared July’s rate cut was a “mid-cycle adjustment,” a head-scratcher that markets initially thought meant the Fed would go no further.

Bostjancic said Powell is unlikely to signal a “hard stop” this time either, preferring instead to tell the public that policymakers will take things one meeting at a time.

“They’ll keep the phrase ‘we’ll act as appropriate’ to sustain the expansion but at the same time at the press conference he can emphasize that it’s a meeting-by-meeting basis,” Bostjancic said.

Early Wednesday could bring more unwelcome news as a much-anticipated third quarter GDP is expected to show a sharp slowdown in the economy. And October jobs numbers due Friday are likewise forecast to show weaker hiring.

Futures markets as of Tuesday expected a rate cut this week, but did not see another change in benchmark lending rates before June of next year.

A rate cut this week would mean the Fed has erased three of the four rate increases from last year, implemented at a time when the economy was picking up steam and before the tariff battles with China and Europe began to slow activity and freeze investment.

As he works to strike the right tone, Powell is also contending with broadening divergences among Fed members.

The normally dovish Charles Evans of the Chicago Federal Reserve Bank said earlier this month that interest rate policy is already “in a good place” as it is.

But Dallas Fed President Robert Kaplan, who in January will become a voting member of the Fed’s rate-setting Federal Open Market Committee, said policymakers should avoid suggesting they will stop here.

“This is a really fragile time where this could break either way. The jury is still very much out,” he said, according to The Wall Street Journal.

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