Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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“Disappointing.”  That’s a description that hasn’t applied to the U.S. employment growth in a long time.  But the Department of Labor’s August employment report fell well short of predictions, adding to concerns that the economy may be slowing and firming expectations that the Federal Reserve (Fed) will continue slashing rates in order to forestall what some see as a growing risk of recession. 

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Will they, or won’t they?  The ‘they’ is the Federal Reserve and the question is whether the policy-setting Federal Open Market Committee (FOMC)  will lower interest rates when it meets next in late July.  The committee voted 9-1 in June  to leave rates unchanged, but a post-meeting statement, eliminating previous references to “patience,” signaled a willingness to consider a rate cut, though probably not before next year. The statement also downgraded the committee’s assessment of economic strength from “solid” to “moderate.” 

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The Federal Reserve’s decision to cut rates by a quarter-of-a-point this month didn’t surprise anyone – but it also did little to satisfy either critics (including two Fed dissenters) who thought the reduction  was unnecessary (and possibly harmful) or President Trump, who has been demanding larger cuts to boost economic growth.

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 Reflecting the impact of the simmering (trade war with China and the threat of tariffs on Mexican goods, the employment picture darkened considerably in May.  Employers added only 75,000 workers to their payrolls, way below the 180,000 analysts had expected, while estimates for March and April were also scaled back.