US Fed leans toward a cut

Analysts expect the bank to reduce rates by a quarter point this week

US President Donald Trump's frequent badgering of Federal Reserve Chairman Jerome Powell to cut interest rates may complicate what should be a routine decision when the Fed meets this week.

A few analysts expect the Fed's board of governors to cut rates by a quarter point when they meet on Tuesday and Wednesday in Washington. Such a move would stimulate the economy following last month's tepid jobs report. But cutting rates now might be seen as giving in to Trump's demands and that could damage the Fed's reputation for independence — especially after the president called for rates to be cut by a full percentage point in April.

Jan Hatzius, chief economist at New York investment bank Goldman Sachs, said he expects the Fed to leave interest rates unchanged for the remainder of the year. He believes Powell's promise to act "as appropriate" wasn't intended to signal an impending rate cut, but to show the central bank was aware of rising trade tensions with China and its effect on the economy.

"Powell … will not want to feed the expectation that cuts are imminent, especially as the meeting comes right before G20 summit and its potential Trump-Xi meeting and the subsequent US decision whether to go through with the across-the-board China tariff. …The right course of action is to retain option(s)," Hatzius said in a research note to investors.

The 14th meeting of the G20 leading economies will be held on June 28-29 in Osaka, Japan. It is unknown whether Trump and Chinese President Xi Jinping will meet face-to-face.

Some analysts cite May's weak job report as the need for a rate cut. The US economy added 75,000 jobs in May for the 104th consecutive month of employment gains, but hiring slowed. Analysts expected companies to add 180,000 jobs last month, but employers hired only 41.6 percent of the anticipated total. Nevertheless, the unemployment rate remained unchanged at 3.6 percent, a 50-year low, and wages remained strong as companies competed to attract and retain workers.

But a survey of 46 economists by The Wall Street Journal found that just two of them expect the Fed to cut rates this month while about 40 percent believe the cut will come in July and about 30 percent expect a rate cut in September.

The economists expected the Fed funds rate to fall to 2.12 percent by the end of 2019 and to 1.96 percent by the end of 2020, suggesting one cut this year and another in 2020. The current federal funds rate has held steady since December at 2.5 percent.

The Fed has raised rates nine times since 2015, but last year investors became concerned that money was too tight and could tip the economy into a recession, defined as at least two consecutive quarters of negative growth. In March, most Fed officials expected no rate increases in 2019 but there was no talk of a cut. It left rates unchanged in May. Inflation remains low.

The Fed is independent and its decisions do not have to be approved by the president.

Trump's criticism of the Fed has been constant and harsh. Presidents sometimes criticize the Fed's monetary policy, but it was always done quietly in the past. Trump's public comments are unusual.

On April 30, Trump tweeted: "We have the potential to go up like a rocket if we did some lowering of rates, like one point."

In an interview with The Washington Post on November 27, 2018, Trump said: "I'm doing deals and I'm not being accommodated by the Fed. They're making a mistake because I have a gut, and my gut tells me more sometimes than anybody else's brain can ever tell me."

The Federal Reserve, the nation's central bank created by Congress to create a flexible and stable monetary system, has branches in 12 districts across the US to carry out day-to-day operations and to monitor the economy.