Fed Signals a Rate Cut Remains Possible, Despite Glimmers of Economic Hope

The United Kingdom drew closer this week to exiting the European Union with a deal and trade talks with China have led to a mild de-escalation. But those hopeful signs were not enough to soothe Federal Reserve officials’ worries about the United States economy.

As they head into a quiet period ahead of their next policy meeting on Oct. 29-30, central bankers’ commentary suggests that a rate cut this month ranks somewhere between possible and likely. Officials remain wary as business investment pulls back domestically and economies abroad weaken.

“Global growth estimates continue to be marked down, and global disinflationary pressures cloud the outlook for U.S. inflation,” Fed Vice Chairman Richard Clarida said on Friday, speaking from prepared remarks in Boston.

The Fed “will proceed on a meeting-by-meeting basis to assess the economic outlook as well as the risks to the outlook,” he said, and “will act as appropriate to sustain growth, a strong labor market, and a return of inflation to our symmetric 2 percent objective.”

Mr. Clarida’s comments did little to temper market expectations for a coming reduction in interest rates: Investors have nearly fully priced in a quarter-point rate cut at the end of the month. That would lower the federal funds rate to a range between 1.5 percent to 1.75 percent. Officials avoid surprising markets when possible, because doing so can inadvertently tighten financial conditions and slow borrowing and spending.

While Mr. Clarida made it clear that the economy is now “in a good place” and the unemployment rate is at a half-century low threats remain.

Despite some softening around the edges, geopolitical tensions are unresolved. President Trump’s trade war with China may have reached a temporary détente, but the agreement has yet to be finalized and would not roll back the tariffs on hundreds of billions of dollars of goods that China and America have placed on each others’ products.

Mr. Trump on Friday increased levies on goods from Europe, and tensions could escalate if he decides next month to place a tariff on imported automobiles.

In Britain, Prime Minister Boris Johnson has managed to negotiate a Brexit deal, lowering the chances of an economically harmful no-deal exit that could have global economic repercussions. But it remains unclear whether that agreement will be approved in Parliament.

Even if those uncertainties clear, data increasingly suggest that economic damage is already materializing.

A global slowdown is well underway. The International Monetary Fund lowered its expectations for global growth in 2019 to 3.0 percent, the lowest rate since the financial crisis, in projections released Tuesday. Manufacturers are slumping around the world, and the American factory sector has pulled back markedly.

The United States’ economic strength has hinged on everyday consumers, whose spending makes up about two-thirds of the economy. But there are early signs that households might be cracking: retail sales unexpectedly declined in September, data this week showed.

Policymakers have seen a strong job market and climbing wages as positives that should keep households feeling good. But employment gains have begun to slow and both average hourly earnings and a broader measure of wages and benefits have grown more gradually in recent months, suggesting that business caution may be spilling over.

Despite mounting warning signs, the housing market is holding up, bolstered by Fed rate cuts in July and September. While overall output growth is slowing, that was expected as stimulus from Mr. Trump’s 2017 tax cut fades, and gains remain at or above the economy’s longer-term trend.

“This is a fluid situation, you’ve got a lot of uncertainty,” Robert Kaplan, president of the Federal Reserve Bank of Dallas, told reporters on Friday at an event in Washington. Though he does not have a vote on monetary policy, he does sit at the decision-making table.

He remains “agnostic” about whether a cut is needed this month, he said, and wants to keep the Fed’s options open going forward.

“This is a fragile time where this could break either way,” he said.

Recent interest rate decisions have been contentious for Fed officials, as positive current data clash with myriad risks to the outlook. Three members of the rate-setting Federal Open Market Committee dissented from the central bank’s September decision to lower rates, the most of Chair Jerome H. Powell’s tenure.

Two of the Fed’s regional bank presidents, Kansas City’s Esther George and Boston’s Eric Rosengren, wanted to leave rates unchanged. One, St. Louis’ James Bullard, wanted a sharper cut.

Those divisions persisted into October. Inflation has remained below the central bank’s 2 percent target, which is increasing some officials’ appetite for additional moves.

“I think we’ve adjusted things in a pretty good place,” Charles Evans, president of the Federal Reserve Bank of Chicago, told reporters earlier this week, Bloomberg News reported. “Another rate cut would make me more confident that inflation was well positioned to go up to 2 percent, absolutely.”

But Ms. George has continued to warn that lowering rates could lead to financial excesses and that her current outlook does not call for another cut. She is also keeping an eye on the economic data and risks, however, and hinted in remarks on Friday that she could change her mind.

“I will remain attentive to the incoming data for signs that downside risks to the outlook materialize in a way that meaningfully affects broad economic conditions,” she said, speaking in Denver. “Under those circumstances, I would be prepared to adjust monetary policy accordingly.”