The Fed needs to answer one big question

The Federal Reserve is widely expected to cut interest rates at the conclusion of its two-day meeting on Wednesday.

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A rate cut would be the Fed’s second in the same number of meetings as it looks to keep the longest economic expansion on record going into a 12th year.

“The Fed will likely cut 25bp at this week’s meeting and guide toward further rate reductions,” New York-based Bank of America Merrill Lynch economists wrote Monday. “The meeting should have a dovish tone. However, in our view, the big question is whether Chair Powell continues to characterize the easing cycle as a 'mid-cycle adjustment."

Recent economic data has softened a bit as the U.S.-China trade war has stretched into its second year. The U.S. economy grew at an annualized 2 percent rate in the second quarter, down from the previous quarter’s 3.1 percent print. U.S. manufacturing and employment data have also shown signs of slowing.

President Trump is well aware of how important a strong economy is to his reelection chances. He has repeatedly attacked the central bank, calling for it to cut rates to boost the economy.

“The United States, because of the Federal Reserve, is paying a MUCH higher Interest Rate than other competing countries,” Trump tweeted Monday.

“They can’t believe how lucky they are that Jay Powell & the Fed don’t have a clue. And now, on top of it all, the Oil hit. Big Interest Rate Drop, Stimulus!”

Trump isn’t the only one calling for a big rate cut.

St. Louis Fed President James Bullard, who is a voting member, said earlier this month an outsized 50 basis point cut is needed to get ahead of market expectations and cushion the economy from the U.S.-China trade war.

Still, traders at the CME Group are pricing in a 65.8 percent chance the Fed cuts rates by 25 basis points on Wednesday, down from more than 90 percent just last week. They see a zero percent chance of a 50bp cut.

The Fed in July cut interest rates for the first time in over a decade, citing low inflation and uncertainties in the global economy. Minutes from the July meeting showed Fed officials saw the rate cut as a “mid-cycle adjustment” and wanted to avoid the appearance that they were following a “preset course.”

Even without a 50bp cut at Wednesday's meeting, the Fed is expected to lower rates further before the end of the year.

“Beyond the September meeting, we continue to expect the FOMC to deliver a third and final 25bp cut to 1.5-1.75 percent in October,” a Goldman Sachs economics research team wrote Friday.

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“A 75bp total realignment of the policy rate appears to be roughly the ‘mid-cycle adjustment’ following the 1990s template that the Fed leadership has in mind, a moderate response to moderate concerns about growth risks and soft inflation.