Think of the economics profession like a living laboratory. Questions are constantly arising about the labor market, inflation, trade policy, interest rates, foreign exchange. And the economists are constantly fanning out in search of answers.
Last week, economists at Bank of America hustled to run the math on the current level of official U.S. interest rates, set by the Federal Reserve in a range from 2.25% to 2.5%.
It's already a low rate by historical standards, and the Bank of America economists reached the conclusion that the U.S. economy was strong enough for the Federal Reserve to avoid cutting rates at the central bank's next monetary-policy meeting, scheduled for July 30-31. The inevitable solution, then, was that the Fed wouldn't cut rates at all.
The call showed moxie, nerve, backbone, grit, mettle -- all the synonyms that come up when one types "fortitude" into Thesaurus.com. Pricing for federal-funds futures contracts, traded on the Chicago Mercantile Exchange, were implying a 100% chance of a rate cut. In other words, futures traders saw a 0% probability that Bank of America was right.
Then on Wednesday, during his semiannual testimony before the U.S. House of Representatives, Federal Reserve Chairman Jerome Powell said little to push back against the market conviction. Instead, he highlighted the risk that President Donald Trump's trade war with China might continue to hamper consumer confidence, not to mention the willingness of business executives to invest in new factories, equipment, technology and personnel.
"The bottom line for me is that the uncertainties for global trade continue to weigh on the outlook," Powell said during the hearing.
According to the Bank of America economists, it was tantamount to the professor giving out the answer.
Despite Powell's assertion that he plans to monitor incoming economic data over the next three weeks, it appears the Federal Reserve has already made the decision to cut rates, the economists wrote Wednesday in a report.
"Powell delivered a dovish testimony, hinting strongly at an upcoming cut," according to the economists, led by Michelle Meyer and Joseph Song.
One explanation of the Fed's apparent resolve to cut rates despite solid U.S. economic data, they wrote, lies in the fact that Powell appears worried about slowing international growth.
But there's also a lot of pressure on Powell to deliver a rate cut. Since investors are so certain that the Fed will cut rates, then stocks and other risky assets that typically get a boost from looser monetary policy would surely tumble if the Fed suddenly decided to hold firm, the economists wrote.
Trump has helped to whip up traders' expectations for a rate cut by repeatedly tweeting that the Fed has set monetary policy too tight, despite Powell's insistence that the central bank is immune from political jawboning.
And indeed, expectations of a rate cut have helped to push the S&P 500 index of large U.S. stocks to a record high as recently as last week. The economy is projected to climb at a respectable 2.5% pace this year; unemployment is at its lowest in a half century.
"The market has acted as if the Fed has already cut," wrote the Bank of America economists. "If the Fed does not deliver, financial conditions will tighten, creating a headwind for the economy. This puts the Fed in a difficult position."
Ian Shepherdson, chief economist at the highly respected forecasting firm Pantheon Macroeconomics, also had projected that the Fed would hold rates steady at this month's meeting. But he too has now capitulated, saying a rate cut looks likely unless data released in the coming weeks prove unusually strong.
"The bar for not easing now is high," he wrote.
Sometimes, it's less important to get the right answer than to read people -- in this case, Powell, Trump and the futures traders in Chicago.