Fed Preview: Powell Can Rest on Jobs and Inflation Record, But Markets - and Trump - Expect 2020 Rate Action

Fed Chair Jerome Powell's rate cuts have kept the job market strong while having little impact on inflation, but trade uncertainty could trigger a 2020 standoff with an impatient President and expectant financial markets.
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The Federal Reserve will publish its final interest rate decision of the year Wednesday amid the strongest job market in fifty years and solid domestic growth, but trade uncertainty, as well as an impatient President, will keep Chairman Jerome Powell from resting too easily heading into what could be a 2020 standoff with financial markets.

Powell and his colleagues on the Federal Open Markets Committee, which decides the benchmark interest rate for the U.S. economy, said in October they would "continue to monitor" economic data, Fed-speak for a "wait-and-see" approach, while vowing that only a "material change" would spur the central bank into a near-term move on rates, which have been cut three times this year to the current range of 1.5% to 1.75%.

"The statement today, therefore, likely will repeat that growth is "moderate" and the labor market is "strong", while inflation continues to run below 2%," said Ian Shepherdson of Pantheon Macroeconomics ."That's a recipe for inaction, especially against the backdrop of the trade war."

"Any changes today will be tiny; the Fed clearly does not want to be in the business of aggressively forecasting twists and turns in the economy as a consequence of tariffs," Shepherdson added.

Thus far, the Fed has attempted to steer clear of either commenting on or forecasting the effects of President Donald Trump's current trade stand-off with Beijing, even as tariffs on more than $500 billion worth of China-made goods add to input cost pressures for U.S. manufacturers and end-price increases for U.S. consumers.

"It may well have been that optimism after President Trump announced a phase 1 deal with China concerning agriculture products gave a lift to sentiment and activity," said ING's chief international economist James Knightley. "However, the fact we are now two months on and there has been no signed deal underline the message that trade remains a very challenging area."

CME Group futures suggest virtually no chance of any change in rates when the Fed publishes its official statement at 2:00 pm Eastern time, although bets on a 2020 reduction are starting to accelerate, even as the Fed's so-called 'dot plots', which forecast the general path of projections from its various Governors around the country, suggests at least two rate hikes.

The market expects at least one easing, so someone is going to be wrong," Shepherdson argues. "But we see no near-term resolution to the disagreement; the data haven't shifted enough to change minds either way."

Any move to hike rates in an election year would certainly infuriate President Trump, who has consistently criticized the Fed for its December 2018 decision to hike rates - triggering a sharp 15% decline in the S&P 500 and a spike in the U.S. dollar that Trump says hurts farmers and manufacturers in global export markets.

Last month, Trump invited Powell to a surprise meeting at the White House in which "everything was discussed", according to the President, just days after he attacked the Fed Chair during a speech to the Economic Club of New York in Manhattan.

Trump touted a litany of financial market achievements during his first two years in office during the address, adding they came about "despite a near-record number of rate increases and quantitative tightening by the Federal Reserve since I won the election."

"Remember, we are actively competing with nations who openly cut interest rates so that now many are actually getting paid when they pay off their loan - known as negative interest," he incorrectly explained. "Who ever heard of such a thing? Give me some of that. (Laughter.) Give me some of that money. I want some of that money. Our Federal Reserve doesn't let us do it."