It’s summertime and the living is easy, but the economy is as confusing as ever.
Unemployment is sitting at the historically low level of 3.8 percent; there are tentative signs that wages are finally moving toward catching up with the rest of the economy and, in turn, consumer spending looks to be fueling decent GDP expansion.
But despite all this, the Federal Reserve is widely expected to cut interest rates this week — a move usually reserved for a struggling economy, with the last reduction occurring during the depths of the financial crisis in 2008.
Such a play by the Fed would also mark an about-turn from its most recent policy of gradually returning rates to pre-crisis levels after having kept them hovering at close to zero for several years. So why is the independent central bank even thinking about this?
According to former Fed chair Janet Yellen, who stepped down last year and is in favor of a quarter-point cut, the answer seems to be caution as the Fed seeks to protect the U.S. economy from the ongoing trade battle with China at the same time a mounting pile of evidence points toward a faltering global economy.
“The global economy has weakened. I think partly it’s weakened because of conflicts over trade and the uncertainty that’s caused for businesses,” said Yellen, who was speaking at an economic conference in Aspen, Colo., over the weekend.
“The United States isn’t an island…We’re part of the global economy. What happens in the rest of the world — in Europe, in Asia — affects the United States. And it’s also true that U.S. monetary policy affects conditions all around the globe,” she added.
And while on the surface the U.S. economy appears to be in good shape, some cracks are starting to appear — policymakers are concerned that inflation is too low and the manufacturing sector is beginning to run out of steam.
One would think that a rate cut would please President Donald Trump, who has repeatedly publicly criticized the central bank for raising rates four times last year.
On Monday he continued his attack of the Fed, tweeting that it has “made all of the wrong moves.”
However, it looks like the expected cut of 25 basis points will not be enough for him. He added: “A small rate cut is not enough, but we will win anyway!”
The markets appear to be more buoyed. The prospect has led to the U.S.’ major indices flirting with all-time highs in recent weeks as traders bet on a cut, although the Dow Jones Industrial Average rose just 29 points, or 0.1 percent, to close at 27,221 Monday, while the S&P 500 slipped 0.2 percent.
It was also a pretty mixed bag for retailers. Among the gainers were Abercrombie & Fitch Co., up 4 percent to $18.86; Nordstrom, Inc. 1.4 percent to $30.94; Ralph Lauren Corp., 1.1 percent to $111.27 and Capri Holdings, 0.6 percent to $36.30.
On the other side of the coin were J.C. Penney Co., down 5.6 percent to 75 cents, L Brands Inc., 0.9 percent to $26.16 and Levi Strauss & Co., 0.4 percent to $19.29.