Fed more or less confirms rate cut

The Fed officials I've met over the years have been formidably intelligent and well-educated, so it would be a mistake to underestimate the Fed's ability to call the cycle correctly, even though in the past, it has made mistakes.   One key question remained, though: how much do international conditions influence their deliberations?  This article from Bloomberg is instructive:

The Federal Reserve is preparing to cut interest rates for the first time in a decade because it sees a cooling global economy and no sign of overheating in the jobs market at home.

Since the Fed opened the door to lower borrowing costs last month, plenty more data has arrived to back up the view that “manufacturing, trade and investment are weak all around the world,” Chairman Jerome Powell told Congress at a hearing on Wednesday.

He said June’s jobs report, which showed stronger-than-expected hiring in the U.S., was “great news” -- but not enough to tilt the balance, because wages aren’t rising fast enough to trigger much inflation. In fact, Powell made it clear that inflation is still too low.

Markets saw his comments as confirmation that rates are headed lower at the Fed’s next meeting on July 30-31. Traders stepped up bets that the reduction will be by half a percentage point, though the consensus still foresees a quarter-point cut. Powell didn’t respond directly when asked about the possibility of a 50 basis-point cut.

Fed officials had mounting risks firmly in view when they met three weeks ago, according to minutes of their June 18-19 gathering published later on Wednesday that showed many saw additional policy easing warranted in the “near term.”

Trump has attacked the Fed for keeping rates too high, breaking with the recent convention of presidents not intervening in monetary policy. He has also explored ways he could replace Powell.

With several lawmakers voicing support for Fed independence, Powell was asked how he’d respond if Trump tried to fire him.

“My answer would be no,” Powell said. “The law clearly gives me a four year term and I intend to serve it."

Trade tensions are weighing on business investment and there are other reasons to worry about the global economy, Powell said.

“Momentum appears to have slowed in some major foreign economies,” he said, and the weakness could spread to impact a U.S. economy that’s currently on a “solid footing.”

In an increasingly interconnected world, one where the relative importance of the US is declining, it makes a lot of economic sense for the Fed to consider what's happening in China, Japan, Europe, Brazil and India.    Of these, only India is holding up.  Europe, Japan and China are in recession (though China may be troughing) and Russia looks very soggy.   Of course, whether it makes political sense is an altogether different question.