SUMMARY

  • Slowing growth and downside risks set the stage for two rate cuts this year.
  • Trade restrictions are damaging, as is uncertainty over trade policy.
  • The Fed will have to look past politics and focus on its mission.

It’s been a tough year for the Federal Reserve…and it’s only June! Berated in some corners for pushing up interest rates late last year, the Fed changed its tone in January and seemed set for a long, comfortable pause. Then came a barrage of criticism from the White House and an unexpected escalation of global trade tensions. The outlook has become murkier and riskier, leading the markets to cry out for easier monetary policy.

We think the Fed will be forced to acquiesce. Probably not at this month’s meeting; there hasn’t been enough time to send the proper signals to the markets. But lower rates are coming. Here is our take on the likely content of next week’s conversations.

Weekly Economic Update 061419 - Chart 1

Weekly Economic Update 061419 - Chart 2

We are not forecasting a recession, but the odds of one are rising. Trade-sensitive sectors have been impaired, and targeted retaliation by China against U.S. companies and industries will further the damage. Policy uncertainty is hindering business investment. And as discussed below, the outlook for American consumers may not be as bright as it was a few months ago.

Weekly Economic Update 061419 - Chart 3