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The Fed is keen to cut prices again. This is what to look at.




WASHINGTON – Federal Reserve officials are expected to cut interest rates for a second time Wednesday, a move that could prove divisive among Fed officials and exacerbate President Trump's anger at the central bank.

The Fed's interest rate decision, which will be announced at 2 p.m. in Washington, will be accompanied by a new set of quarterly financial projections, followed by a news conference at 2:30 p.m. with the chair Jerome H. Powell.

That means markets will have plenty of information to digest as they try to figure out what's coming after the Fed, which lowered its key rate by a quarter for the first time in more than a decade in July when officials tried to protect the economy from uncertainty created by Trump's trade war and a global economic downturn.

But the risk has increased since then, puts the Fed under increasing pressure to help keep the United States' record-breaking economic expansion underway.

Mr. Trump launched his trade war with China just after the Fed's cut in July .

While China and the United States plan to resume talks next month, a resolution is hardly assured and the world economy continues to fluctuate. Production data has deteriorated globally, job growth in the United States is decent, but moderating, Britain's slippery exit from the EU is still a question mark, and air strikes on Saudi oil plants can increase geopolitical tensions.

Will it be enough to tip some officials in favor of future interest rate cuts? Probably, based on their public comments. James Bullard, president of the Federal Reserve Bank of St. Louis, suggested in a recent interview with Reuters that he would favor a half-point interest rate cut – equivalent to a third cut, for dot-plot purposes.

However, not everyone is expected to agree on even a moderate cut. Esther George and Eric Rosengren, who are also voting members of the rate-setting Federal Open Market Committee, have been less enthusiastic about getting ahead of the risk before they become an economic reality. They disliked the interest rate cut in July and could do so again at this meeting.

When it comes to the data, things actually look pretty good. With 3.7 per cent, unemployment hovers near a 50-year low. General growth has continued, and consumers are still spending heavily, though the University of Michigan survey suggests they are becoming less confident as the trade war speaks to many.

Inflation remains firmly below the Fed's 2 percent target – which it has been almost regularly since the central bank formally adopted this target in 2012 – but it has shown signs of shrinking backup.

The Fed will release new projections for growth, unemployment and price gains through 2022, and they can provide insights into what officials expect. They previously predicted that unemployment and inflation rates would rise slightly in the coming years as growth slowed.

Perhaps the biggest wild card at this meeting is Mr. Powell's news conference. The Fed board roiled markets after the July meeting because investors interpreted its statement that the Fed's interest rate cut was a "mid-cycle adjustment" as a sign that the central bank had no plans to aggressively cut borrowing costs.

Mr. Powell has little to gain by making definitive promises: Trade policy is one of the biggest risks on the horizon, and they have the potential to change quickly. The Fed could face very different conditions at its meeting on 29-30. October, which comes after US and Chinese officials meet.

"We believe Powell will steer clear of the mid-cycle adjustment phrase that caused waves in July, and instead favors a prejudiced recalibration of prices," economists at Evercore ISI wrote in a research note that previewed the meeting.

Whatever Powell says, there seems to be a reaction from the White House. While Trump has no ability to directly influence Fed policy – the central bank is isolated from politics and responses to Congress, not the White House – he has made a habit of weighing in on the decisions.

Mr. Trump has been running his attacks on Twitter in recent months, in a figurative call to Mr. Powell for a bad golfer labeled him an enemy and said he and his colleagues are " boneheads . "He has even suggested that the Fed should adopt negative rates, a policy that is intact in the eurozone and Japan, which has very low inflation and more fragile economies.

You can also hear the phrase "standing repo facility" that was taped around 2pm.

Little background: There has been some turmoil in the money markets this week as a maturity date for corporate tax and government bond issuance combined to give a short-term deficit. This creates problems for the Fed – it makes it more difficult to keep the policy rate under control and risks tightening financial conditions in ways that curb loans and spending.

As a result, some economists believe the Fed will discuss ways to keep these markets smoothing together – while also strengthening the Fed Fund's rate – at their meeting. Analysts believe the alternatives could include a technical fine-tuning of the Fed's interest rate registration tool, a resumption of bond purchases that will cause the Fed's balance sheet to grow with the economy to protect against future cash crises in money markets, and a standing repo facility.

“Repo” is the abbreviation for Treasury repurchase agreements, short-term loans taken overnight by financial institutions such as hedge funds and banks. "Standing facilities" refers to a regular Fed program that allows banks to convert government securities into reserves – money held by the central bank – on demand, at a rate set by the Fed.

In theory, such a tool would hold reserves, which banks sometimes prefer for regulatory reasons, to be scarce. It will help money markets work better in times of stress, because banks will be less likely to hoard their reserves. As a result, it will prevent the Fed from stepping in to cool down. The central bank had to do it twice this week, a first since the financial crisis.

It is not clear whether the Fed will make any major changes to this meeting. The officials tend to be a contemplative bunch, and they have not previewed a shake. But market conditions can drive the institution's hand, so it's worth looking at moves in that direction.

"I had been skeptical that they would introduce a standing repo facility – I think now the likelihood of that has gone up," said Seth Carpenter, chief of the US economist at UBS.



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