The US Federal Reserve concludes its latest two-day policy meeting on Wednesday expected to leave interest rates on hold but flag whether it plans to cut rates later this year as investors expect and the US president has demanded.
The central bank may nod to recent weaker-than-expected jobs numbers and softer inflation, and drop from its policy statement a pledge to be "patient" before changing rates - opening the door to a possible rate reduction later.
But the level of concern raised around fresh economic risks, and the language Chairman Jerome Powell uses in his post-meeting press conference, will be read by investors and perhaps even more significantly by
President Donald Trump as a sign of whether officials are poised to act soon or are still biding their time.
The policy statement and new economic projections are to be released at 11:30 PM Indian Standard Time, followed by a Powell press conference at 12 AM IST.
"If they don't (reduce the interest rate) in June, the words he uses are going to have to be pretty careful that they are open to July," said Mark Stoeckle, CEO of Adams Funds, which caters mostly to individual investors.
Fed policymakers "don't want to make it sound like (they) are beholden to the market or to the president," he said, but even a token single rate cut in July "buys you some time to get more data ... It saves face for everybody."
As Fed officials gathered in Washington on Tuesday, news reports surfaced describing efforts by Trump earlier in the year to determine if he could remove Powell as chairman of the central bank.
Powell, as head of an independent agency, is thought to be insulated from such a move by law. Still, it was a reminder to policymakers that as Trump gears up his 2020 reelection effort he remains convinced the Fed is hampering an economy whose performance may prove central to his chances at a second term.
Fighting a trade war on several fronts and with some expectation growth may slow this year, he has singled out central banks globally for his ire. He has noted that China's monetary policy was shaped by politicians in a way he felt left him at a disadvantage in trade negotiations.
On Tuesday, he slammed European Central Bank President Mario Draghi for raising the possibility of fresh stimulus to bolster weak European growth, which Trump saw through the lens of a weaker euro, a stronger dollar, and higher prices for US exports.
"Very unfair to the United States!," Trump said on Twitter.
Picking on Powell
But for a year the criticism of Powell has been biting, and on Tuesday Trump sent a thinly veiled threat as Fed officials were in the middle of their two-day deliberation over rates.
Asked by reporters outside the White House if he wanted to demote Powell, Trump said "let's see what he does."
The Fed's short-term overnight interest rate influences a variety of other borrowing costs. That shapes economic activity by determining what consumers pay to buy houses and cars, how investors evaluate assets, and even what happens in a stock market that Trump often cites as a proxy for his performance.
Fed officials feel their four interest rate increases last year, far from crimping the recovery, were an appropriate response to the fact that Trump's tax and spending policies pushed the economy, at least temporarily, to accelerate faster than had been expected. In the Fed's view, they helped guard against inflation, possible financial market bubbles and other problems.
But since then other risks have become more central, including the danger that some of Trump's own trade policies may damage a global economic expansion in more profound ways than initially thought, undermining business confidence and slowing investment and hiring.
That narrative has caused investors to bet that the Fed this year will approve two or three reductions of a quarter-percentage-point to the federal funds target rate, set in a range of between 2.25 percent and 2.5 percent since December.
New projections for the appropriate year-end policy rate are unlikely to match those expectations. To do so would require the bulk of the 17 policymakers to cut their rate outlook by a half a percentage point or more, a large shift by historic standards.
Not only do Fed officials downplay the risk of a serious economic slump in the near future, they also, somewhat ironically, see Trump's very volatility as a reason to remain noncommittal.Just as unexpected tariff threats sent markets down in early May, the possibility of progress toward a China-US trade deal, which helped markets rally on Tuesday, has led some officials to want to keep their options open.