For a second straight time, the Federal Reserve is set to cut interest rates this week to try to protect the economy from the consequences of a global slowdown and President Donald Trump’s trade war with China.
After that, no one—not even the Fed itself—seems sure what it will do. The economic landscape looks too hazy and vulnerable to unexpected events, like oil price spikes resulting from the weekend attack on Saudi Arabia’s oil production facilities.
Among the key questions:
Will Trump achieve at least a truce in his conflict with China and diminish a threat overhanging the U.S. economy?
Will Britain avoid a disruptive exit from the European Union that would destabilize the global economy?
Is U.S. inflation, dormant for years, finally starting to reach the level the Fed has long targeted? Could a surge in oil prices even send inflation to heights that would make the Fed uncomfortable about cutting rates? Or would higher energy prices make the officials more fearful of a global downturn and so more inclined to cut rates?
The answers to those uncertainties will influence the Fed’s decisions in the coming months on whether it needs to keep reducing borrowing rates to try to help sustain the U.S. economic expansion now in its 11th year.
It might not matter much in any case. With rates already ultra-low, few economists think a further modest drop in borrowing costs would provide much economic stimulus. Still, the financial markets are anticipating not only a quarter-point rate cut on Wednesday when the Fed ends its latest policy meeting but one or more additional cuts later this year.
Since the Fed’s last meeting ended July 31, the markets have endured a tumultuous ride. On that day, it announced its first rate cut in more than a decade—since the eruption of the financial crisis in 2008. In explaining its move to cut its key short-term rate to a range of 2% to 2.25%, the Fed cited the weakening international economy, uncertainties heightened by Trump’s trade fights and chronically low inflation. It cast its action as a pre-emptive move to sustain the expansion.
Yet the very next day, Trump sent markets plunging when he announced a new round of penalty tariffs against China. Around the same time, he also stepped up his public attacks on the Fed and on Chairman Jerome Powell personally. By the time Powell addressed an annual Fed conference in Jackson Hole, Wyoming, in late August, Trump was tweeting that the man he had chosen to lead America’s central bank was an “enemy” of the United States to rival China’s President Xi Jinping.
Trump’s sniping at the Powell Fed hasn’t let up. He has demanded larger and larger rate cuts. Last week, he insisted that the Fed should cut its benchmark rate to zero—or below, as the European Central Bank has done.
Nearly all economists outside the administration view that idea as unwise if not reckless. Negative rates tend to reflect severe economic weakness — something not characteristic of the U.S. economy, with its slow but steady growth, solid consumer spending and an unemployment rate near a half-century low.
The most serious threat to the expansion is widely seen as Trump’s own trade war. The increased import taxes he has imposed on goods from China and Europe—and the counter-tariffs other nations have imposed on U.S. exports—have hurt American companies and paralyzed plans for investment and expansion.
And despite Trump’s insistence that the Fed aggressively slash what are already historically low interest rates, few businesses feel that borrowing rates are too high or that they can’t obtain loans.
“When we talk to our businesses—and it doesn’t matter the sector, it doesn’t matter the size, it doesn’t matter their geographic location—what’s driving their concern is uncertainty in the policymaking process, especially with respect to tariffs,” said Neil Bradley, executive vice president of the U.S. Chamber of Commerce.
In recent days, the Trump administration and Beijing have acted to de-escalate tensions before a new round of trade talks planned for October in Washington. Yet most analysts foresee no significant agreement emerging this fall in the conflict, which is fundamentally over Beijing’s aggressive drive to supplant America’s technological dominance.
Balanced against a possible truce in the trade war are events that could undercut the economy, from a strike at General Motors to the attack that has temporarily reduced Saudi Arabia’s oil production. The Trump administration says Iran is behind the attack, raising already high U.S.-Iran tensions.
So far, most economists say the temporary loss of Saudi production won’t end up hurting the U.S. economy, primarily because there remains plenty of global supply.
“Higher oil prices are not the big economic deal that they have been in decades past,” said Mark Zandi, chief economist at Moody’s Analytics. “I suspect the Fed will look through the Saudi attack and will stick to their script of delivering a rate cut this week.”
On Wednesday, in addition to announcing its decision on rates, the Fed’s policymakers will update their forecasts for economic growth, unemployment, inflation and interest rates over the next three years. Powell will also hold a news conference.
The case for a rate cut is by no means overwhelming. The job market is essentially healthy, and wages are rising. Last week, the government reported that retail sales rose in August. An index of consumer sentiment produced by the University of Michigan has rebounded.
In addition, inflation, which has run chronically below the Fed’s 2% target rate for years, may be picking up. The government said core consumer prices, excluding the volatile sectors of energy and food, rose 2.4% over the past 12 months—the fastest such pace in more than a year. If the Fed’s policymakers conclude that inflation will sustain a faster pace, it might give them pause about cutting rates much further.
Still, the course of the trade war, along with other unknowns like the outcome of Brexit, will likely be the biggest factor in the Fed’s decision-making.
“They have to react to policies that can change with the speed of a tweet,” said Diane Swonk, chief economist at accounting firm Grant Thornton.
On Monday, Trump linked the oil attack and the Fed’s rate decision, saying that after “the oil hit,” the economy needs “Big Interest Rate Drop, Stimulus!”
But some analysts think the Fed might react to Trump’s rising demands for steep rate cuts by making explicitly clear that it’s keeping its focus on the economy.
“The Fed will send a message to President Trump saying that domestic conditions, including economic growth and inflation currently, do not justify any more significant cuts in interest rates,” said Sung Won Sohn, business economist at Loyola Marymount University in Los Angeles.
David Jones, the author of several books on the Fed, said he expects the Fed’s message to echo the one Powell sounded at an event this month in Switzerland in which he suggested that the economy appears resilient despite heightened uncertainties and weaker growth.
“As opposed to Mr. Trump and his criticism, Powell feels the economy is in good shape, and he wants to keep it that way,” Jones said.