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Fed is expected to cut key rate Wednesday.

What zero or negative rates would mean for you


Fed is expected to cut key rate Wednesday.

Paul Davidson


Published 12:01 AM EDT Sep 17, 2019

Despite firming inflation and easing trade tensions, the Federal Reserve is expected to lower interest rates Wednesday for the second time in less than two months and pave the way for another likely cut later this year to head off persistent risks from overseas.

“There’s no way they can walk that back at this point,” says Wells Fargo Senior Economist Tim Quinlan.

The move is likely to ripple through the economy, pushing down rates for credit cards, adjustable-rate mortgages and auto loans.

Yet with economic reports decidedly mixed in recent weeks, Fed Chairman Jerome Powell must bridge continued sharp divisions among Fed policymakers, many of whom favored no rate decrease in July.

At the close of a two-day meeting Wednesday, the Fed is expected to trim its benchmark rate by a quarter percentage point to a range of 1.75% to 2%. The Fed agreed to a similar move in late July in its first rate cut in more than a decade.

Morgan Stanley also expects the central bank to reiterate that “uncertainties” about its outlook remain and the Fed “will act as appropriate to sustain the expansion.” Any changes to that language “would signal some pushback against expectations of” a third rate cut later in 2019, economist Michael Feroli of JPMorgan Chase wrote in a note to clients.

That scenario likely would spook markets already roiled by Monday’s spike in oil prices following an attack that disrupted production in Saudi Arabia.

Although Powell told reporters in July the economy has performed well, he cited risks posed by President Trump’s trade war with China, sluggish global growth and stubbornly low inflation.

As a result, U.S. consumer spending remains healthy but manufacturing and business investment have been weak. Fed policymakers want to avoid a recession because interest rates are still historically low, leaving officials little room to cut in a downturn.

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Yet a core measure of the consumer price index that excludes volatile food and energy costs rose 2.4% annually in August, its strongest reading since July 2018, the Labor Department said last week. Wage growth also surged last month. And the U.S. and China agreed to resume trade talks in October. That prompted China to announce that it will remove tariffs from U.S. pork and soybean imports while the U.S. delayed a tariff increase on $250 billion in Chinese imports.  

Meanwhile, retail sales beat expectations in August, building on a strong showing the prior month. Consumer spending makes up about 70% of economic activity.

At the same time, the economy is flashing some worrisome signs. First, hopes for a resolution of the trade war have been raised and dashed several times in recent months. The reality is the U.S. has slapped tariffs on more than $350 billion of Chinese imports with duties on another $200 billion set to take effect in mid-December.

Also, job growth has slowed noticeably and an index of manufacturing activity revealed contraction in August for the first time since 2016.

The split-screen economic signals mean the Fed will likely continue to be fractured this week, says Diane Swonk, chief economist at Grant Thornton. In July, eight Fed policymakers said they think there should be no rate decreases this year while seven favored two quarter-point cuts. In the end, two of 10 voting policymakers dissented from the Fed’s decision.

Powell also must endure continued taunts from Trump, who has called for sharper rate cuts and even negative interest rates to help the U.S. keep pace with Europe.But with easing trade tensions and somewhat stronger inflation, the odds of a half percentage point cut Wednesday are “quite low,” Feroli says.

Whatever the Fed decides, “The president will no doubt complain, but that has become par for the course,” Swonk says.

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