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Slumping Data May Force Powell to Move to Third Cut

Steve Matthews

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Federal Reserve Chairman Jerome Powell, who’s noncommittal about further interest rate cuts, is facing greater pressure to make a third-straight reduction in response to weakening data, volatile markets and a continued bashing from President Donald Trump.

Markets placed about a 87% chance of a quarter-point rate reduction at the Oct. 29-30 meeting, up from 40% on Monday, after manufacturing, services and employment figures slumped this week. U.S. stocks headed for a third straight weekly decline as recession fears increased.

“The flow of the data has increased the case for a rate cut in October notably and markets are pricing it in,” said Joseph Song, senior U.S. economist at Bank of America Corp. “If the data continue to come in weak, that could get moderates and hawks to come on board to provide some sort of buffer for the economy.”

Chicago Fed chief Charles Evans said Thursday the latest data haven’t yet convinced him to cut rates again. In a Bloomberg interview in Madrid, the often dovish policy maker said he’s open minded about the decision.

Powell told reporters after the central bank’s meeting Sept. 18 that the Federal Open Market Committee would decide rates “meeting-by-meeting,” and further cuts would depend on incoming reports. At that time, just seven of 17 policy makers projected any more cuts this year. Powell described the reduction as insurance against a 10-year-old expansion falling into recession.

But the outlook has darkened since then, particularly this week.

On Tuesday, a key factory index fell to a 10-year low as businesses hold back investments amid tariffs and the U.S.-China trade war. And the ADP Research Institute on Wednesday showed hiring at U.S. companies cooling. Quarterly sales reports from automakers such as Ford Motor Co. also added to concern. Adding to angst, data Thursday showed a gauge of services dropped to a three-year low.

“We are seeing spillovers from the manufacturing slowdown into the service sector,” said Sarah House, senior economist with Wells Fargo & Co. “Weakness isn’t isolated to the industrial sector and raises risks to the outlook for consumer spending. This raises the odds of another rate cut as early as this month.”

Trump again blamed Powell for the weak factory data even though economists attribute the slowdown in large part to president’s trade wars. Trump tweeted Tuesday that the “pathetic” Fed has kept rates too high, leading to a rising dollar that hurts American manufacturers. “They don’t have a clue,” he said.

What Our Economists Say

“Bloomberg Economics’ new U.S. recession probability indicator is flashing a warning sign and shows the chance of a downturn within the next 12 months is approximately 25%. Taking into account headwinds tied to trade uncertainty and global slowing, we expect consumer sector resilience and additional Federal Reserve accommodation to support growth.”-- Tom Orlik, chief economist

While Fed officials say they are not moved by criticism from the president or other officials, they are attuned to changes in the data.

Dallas Fed President Robert Kaplan on Thursday said the two rate cuts so far have helped “reduce the likelihood of a very severe slowdown but it doesn’t eliminate it.” He added that when it’s necessary he’d rather move “sooner rather than later.”

On Wednesday, two Fed presidents said they were reviewing data closely. New York’s John Williams said he expects “slower U.S. growth” because of trade tensions and geopolitical tensions. Richmond’s Thomas Barkin said he’s watching to see if weak business confidence will spread to consumers.

“Fed officials for the most part are trying to communicate that they want to be in a wait-and-see mode, but markets aren’t interested in that message,” said Stephen Stanley, Amherst Pierpont’s chief economist, adding that it remains to be seen whether Fed officials will change their tune

While this week’s reports have disappointed, most recent data outside of manufacturing have been mixed and growth during the third quarter is tracking about 1.8%, according to the Atlanta Fed’s estimate. On Friday, the Labor Department will report payrolls and the unemployment rate for September, which could be key to the Fed in evaluating the outlook, said Northern Trust economist Carl Tannenbaum.

“The Fed might want to put the cuts in place in quick sequence — not much to gain from waiting,” said Roberto Perli, a partner at Cornerstone Macro LLC. “Recent data and the drop in stock prices probably help in bringing around some of the skeptical committee members. The leadership might use the shift in market expectations to push for a cut this month as well.”

(Updates with Fed president comment in 13th paragraph)

--With assistance from Sophie Caronello and Catarina Saraiva.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Margaret Collins, Jeff Kearns

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