Jay Powell will today wrap up the thorniest policy meeting of his chairmanship as the Federal Reserve faces a barrage of calls for easy money as the stock market slides in anticipation of soggy global economic growth.
America’s top central banker will face the media at 2.30pm US eastern time, a half-hour after the Fed announces its latest rates decision. President Donald Trump renewed his demands for unchanged rates in advance of the meeting, as did some investors bruised by the recent declines on the stock market.
However, Fed officials have signalled they will boost rates by a quarter point at the meeting, and holding fire would look skittish, according to analysts and strategists. It would send a markedly downbeat signal about the economic outlook; it might indicate the Fed is overly influenced by market turbulence; and it would trigger claims that the president is influencing policy.
“The Fed doesn’t like surprising the market,” said Ralph Axel, an interest rate strategist at Bank of America Merrill Lynch. “It would be more disruptive for the Fed to not hike than to hike.”
Assuming the central bank pulls the trigger on a rate increase, Mr Powell faces a delicate balancing act as he attempts to convey an upbeat assessment of US growth while acknowledging the fears that have roiled financial markets in recent weeks.
Those hazards — dubbed “downside risks” in central banker parlance — include signs of a sharp slowdown in European and Asian growth, induced in part by Mr Trump’s trade wars.
In addition, the Fed is weighing up the chances of a market-jolting hard Brexit in the UK; evidence of a slowdown in US sectors that are sensitive to past rate rises such as housing; and the prospect of waning fiscal stimulus from the second half of next year.
Markets are still pricing in an increase in interest rates when the Fed puts out its monetary policy announcement today. It will mark the fourth move of 2018, putting the Fed’s target range at 2.25-2.5 per cent.
But rates predictions have been curtailed somewhat in recent days. More dramatic has been the fall in market expectations for next year. Back in November, fed funds futures were pointing to two quarter-point rate increases next year, but that measure now implies a strong chance of no move at all in 2019, with only a possibility of a single increase.
Weaker economic data overseas — including contraction in Germany and Japan in the third quarter, and a marked slowing in China — have contributed to angst on the stock market. While the domestic US economy still looks solid as the unemployment rate hovers at just 3.7 per cent, recent days have produced a chorus of complaints from both the president and Wall Street over the Fed’s tightening policies.
On social media, Mr Trump said on Tuesday that Fed officials should read a Wall Street Journal editorial calling for a pause on rates “before they make yet another mistake”. He added: “Feel the market, don’t just go by meaningless numbers.”
Stanley Druckenmiller, a prominent investor who runs Duquesne Family Office, said on Bloomberg television there were “amber” signals on the economy, and that officials needed to pay attention to equity market falls.
To the Fed’s critics, lifting rates further while reducing its balance sheet will squeeze growth when the economy is already at risk of slowing. Recent declines in equity markets are adding to the pressure on the economy: Goldman Sachs analysts say if the recent tightening in financial conditions remains unchanged it would shave between three-quarters and one percentage point off growth next year.
Defying expectations and holding rates unchanged today would carry its own hazards, however. It could be portrayed as capitulation to Wall Street and to a president who has disregarded White House precedent with a steady stream of public advice and admonitions to the central bank. It may also be taken by traders as affirmation of their worst fears about the slowing global outlook — at a time when the central bank needs to offer a reassuring hand.
Mr Powell has recently struggled to offer a steady lead on Fed policy. In early October he gave an exuberant assessment of America’s economic outlook and appeared to suggest multiple rate increases lay ahead.
Yet he amended that message in a November speech that sent rollercoaster stock markets surging again, as he indicated the central bank would not need to lift rates far to get them into the “neutral” range of estimates — levels that neither boost the economy nor hold it back.
Uncertainty will probably grow in the new year, since the Fed is preparing to withdraw its guidance telling markets to expect further gradual rate increases.
The central bank wants instead to keep its options open about what to do next with rates, as it shifts to a more “data-dependent” approach.
Given muted inflation numbers, there appears no burning urgency for the Fed to tighten further. The Fed’s favoured measure of core inflation is hanging at 1.8 per cent, below its 2 per cent target. This has added to speculation that the central bank is lining up a pause on rates in the first half of 2019 — a prospect that beaten-up equity investors would welcome.