In his most recent remarks about the outlook for the global economy US Federal Reserve chairman Jay Powell said: “It’s murky out there.”
Policymakers’ rate decision on Wednesday comes at a difficult moment: economic data have been ambiguous and Fed officials have denied they are paying attention to President Donald Trump’s demands for cuts as deep as 100 basis points.
But business investment is contracting, manufacturing is slowing and trade-related uncertainty is increasingly weighing on the Fed’s decision-making.
The central bank will publish new economic predictions alongside its policy statement.
“I would expect the growth forecasts for next year to be cut, and [forecasts for] unemployment to be raised,” said Ian Shepherdson, chief economist for Pantheon Macroeconomics. “Tariffs are a meaningful hit to real consumer incomes and business confidence has cratered.”
Markets expect a second consecutive 25bp rate cut on Wednesday.
Here are five things to watch for in the rate decision and Mr Powell’s press conference.
The impact of uncertainty
In the Fed’s public record of its conversations with local business owners, known as its Beige Book, mentions of the word “uncertainty” increased from 14 in January to 29 in September.
A September research note from the Fed’s board of governors suggested that trade uncertainty could reduce GDP growth by as much as a full percentage point between late 2018 and early 2020.
“This sounds like a fairly significant impact,” said Tim Duy of the University of Oregon. “Shaving a percentage point off of growth would put output below trend next year. Shouldn’t policy turn clearly accommodative in response?”
When the Fed cut its benchmark rate for the first time in 11 years at the end of July, Mr Powell framed the move not as the start of a prolonged easing cycle but rather as a “mid-cycle adjustment”. The description sent markets tumbling and he is unlikely to repeat it on Wednesday.
Many investors had hoped the Fed would commit to a longer path of accommodation to fend off any shocks from the trade war and slowing global growth.
According to futures prices compiled by Bloomberg, markets see two more cuts by the end of 2020 on top of the one that has been priced in for this week. But the most recent so-called dot plot, which shows the range of estimates for interest rates in future years, is not so dovish.
If the Fed commits to a more regular pattern of rate cuts, Mr Powell will have to set out the reasoning.
For months Mr Powell and the Fed have reiterated that the central bank will “act as appropriate to sustain the expansion”. Any change in his language that suggests the US expansion is at risk would be significant.
Two members of the Federal Open Market Committee dissented from July’s rate cut: Eric Rosengren of the Boston Fed and Esther George of Kansas City. The number of dissenters on Wednesday and their reasons for objecting will be key in understanding the Fed’s decision.
Less widely noticed but just as important are arguments among the doves who want rate cuts. Charles Evans of the Chicago Fed has said inflation has been too low for too long. Jim Bullard of the St Louis Fed is concerned about trade uncertainty.
Mr Powell has been more willing than his predecessors to talk about the lack of consensus and clarity within the FOMC, and his decision to hold press conferences after every meeting has introduced new communication risks.
“This guy is very difficult to understand,” said Joe Ramos, head US fixed income at Lazard Asset Management. “It’s like he is thinking out loud every time he speaks.”
Mr Powell could pick a single story to tell, but it would be out of character. “It’s challenging,” he said at an event in Zurich in early September. “We are clearly at a time where we have a range of views, and I do think that’s a healthy thing.”
Spike in oil prices
To his usual list of foreign political and economic risks, Mr Powell could add disruption to oil supplies from the strikes on Saudi Arabia.
If global crude prices remain high he could emphasise the downside of a drag on consumption, as Americans divert more of their incomes to pay for petrol. Or he could focus on the upside for business investment, as US shale producers respond to increased demand.
Difficult decision to make
On Tuesday, the New York Fed did something it had not done since 2008: it provided $53bn in short-term funding for markets, after the price of repurchase agreements soared.
Banks’ reserves held at the Fed have fallen in recent years, but at the same time demand for safe, liquid funding has grown.
Tuesday’s intervention leaves Mr Powell with an uncomfortable decision.
“[Fed policymakers] have to be OK with becoming the repo market multiple times a year,” said Priya Misra, head of global rates strategy for TD Securities. “The other way would be to change the entire narrative: we’re no longer in an ample reserve regime.”
If the Fed wants banks to increase their reserves, it could do what the White House has been begging for — increasing those reserves by resuming asset purchases.
Mr Powell will be under pressure to address this possibility, while steering clear of calling it what it is: quantitative easing.