Federal Reserve Board Chair Jerome Powell (Photo: Bloomberg)
Federal Reserve Chairman Jerome Powell will probably cut interest rates again next month as insurance against a global slowdown, even with data rolling in that support his forecast for solid U.S. growth and higher inflation.
Retail sales in July rose by the most in four months, data showed on Thursday, suggesting the consumer was holding up ahead of the latest escalation in the U.S.-China trade war. While manufacturing output declined in the month, two regional Fed indexes for August came in higher than expected.
"Prudent risk management would argue for a cut in September because of the downside risks from trade policy and a slowing global economy,'' said Ryan Sweet, head of monetary-policy research at Moody's Analytics Inc. "The incoming data will likely factor into whether or not they go 50 or 25 basis points in September. Right now the data argue for 25.''
Investors have fully priced in another quarter point reduction when the Federal Open Market Committee meets on Sept. 17-18, according to pricing in federal funds futures contracts. Last month, the FOMC cut rates for the first time in more than a decade. Powell described the move as a "mid-cycle adjustment'' and not the start of a long string of rate reductions.
Recession worries were underlined Wednesday when a key portion of the Treasury yield curve inverted — meaning short-term rates were higher than long-term rates — which has previously been an early recession warning. That segment of the curve, between two- and 10-year Treasuries, shifted back to slightly positive on Thursday but remains extremely flat.
"The Fed can't just worry about domestic conditions,'' said Ward McCarthy, chief financial economist at Jefferies. "After 30 years of globalization, the Fed can't go off on its own and has to worry about global conditions. There is reasonable concern about the global economy and the health of financial markets.''
Fed officials have consistently said they don't see any imminent risk of recession, partly because consumers make up 70% of the U.S. economy and have continued to spend. St. Louis Fed President James Bullard on Wednesday described the economy as "quite good'' with unemployment near a 50-year low.
