Federal Reserve Chairman Jerome Powell, who’s noncommittal about further interest rate cuts, is facing new pressure to make a third-straight reduction in response to weakening data, volatile markets and a continued bashing from U.S. President Donald Trump.
Markets placed about a 75 percent chance of a quarter-point rate reduction at the Oct. 29-30 meeting, up from 40 percent Monday, after manufacturing and employment figures slumped this week. U.S. stocks tumbled to the lowest since August as fears of a recession increased.
“The flow of the data has increased the case for a rate cut in October notably and markets are pricing it in that way,” said Joseph Song, senior U.S. economist at Bank of America Corp. “If the data continue to come in weak, that could get moderates and hawks to come on board to provide some sort of buffer for the economy.”
Powell told reporters after the central bank’s meeting Sept. 18 that the Federal Open Market Committee would decide rates “meeting-by-meeting,” and further cuts would depend on incoming reports. At that time, just seven of 17 policymakers projected any more cuts this year. Powell described the reduction as insurance against a 10-year-old expansion falling into recession.
But the outlook has somewhat darkened since then, and particularly this week.
On Tuesday, a key factory index fell to a 10-year low as businesses hold back investments amid tariffs and the U.S.-China trade war. And the ADP Research Institute on Wednesday showed hiring at U.S. companies cooling. Quarterly sales reports from General Motors Co. and Ford Motor Co. also added to concern, sending those stocks lower.
The two-year U.S. Treasury yield fell to 1.48 percent Wednesday from 1.55 percent, reflecting expectations of lower Fed interest rates. The 10-year Treasury yield fell for a fifth straight day as it pushed below 1.6 percent.
“The tightening in financial conditions the past few days is putting more pressure on the Fed to ease again,” said Sarah House, senior economist with Wells Fargo & Co.
Trump again blamed Powell after the manufacturing data showed declines even though economists attribute the slowdown in large part to the trade wars. The president tweeted Tuesday that the “pathetic” Fed has kept rates too high, leading to a rising dollar that hurts American manufacturers. “They are their own worst enemies, they don’t have a clue,” he said.
While Fed officials say they are not moved by criticism from the president or other officials, they are attuned to changes in the data.
New York Fed President John Williams said the outlook was for “slower U.S. growth,” which he attributed to “the effects of the trade tensions and other geopolitical tensions.” Richmond Fed President Thomas Barkin said he’s watching to see if weak confidence in the outlook “which we know has hit businesses now is starting to hit consumers.”
“Fed officials for the most part are trying to communicate that they want to be in a wait-and-see mode, but markets aren’t interested in that message,” said Stephen Stanley, Amherst Pierpont’s chief economist. “Remains to be seen whether Fed officials will change their tunes. ”
While this week’s reports have disappointed, most recent data outside of manufacturing have been mixed and growth during the third quarter is tracking about 1.8 percent, according to the Atlanta Fed’s estimate. On Friday, the Labor Department will report payrolls and the unemployment rate for September, which could be key to the Fed in evaluating the outlook, said Northern Trust economist Carl Tannenbaum.
Some Fed officials, including often-dovish Chicago Fed chief Charles Evans, have pointedly said they don’t see a reason for another cut now, and additional weakness might have the effect of bringing such skeptics along.
“The Fed might want to put the cuts in place in quick sequence — not much to gain from waiting,” said Roberto Perli, a partner at Cornerstone Macro LLC. “Recent data and the drop in stock prices probably help in bringing around some of the skeptical committee members. The leadership might use the shift in market expectations to push for a cut this month as well.”