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The Federal Reserve is expected to cut its benchmark rate for the first time in more than a decade. Good morning. Jeff Sparshott here to walk you up to today’s decision and take you through other key developments in the global economy. Send us your questions, comments and suggestions by replying to this email.
Data Dependent
U.S. consumers continued to spend at a healthy clip while inflation remained soft in June. The readings were the last major economic data-points Federal Reserve officials will see before their policy meeting ends today, and are unlikely to give them pause before lowering the benchmark fed-funds rate, Paul Kiernan and Harriet Torry report.
- Consumer spending, which fuels roughly two-thirds of U.S. economic activity, underpinned growth in the second quarter. While outlays slowed in June, low unemployment and strong income growth suggest consumer fundamentals remain solid.
- The Fed’s preferred inflation gauge in June posted its weakest reading in nearly three years and fell well short of the central bank’s 2% target. There are signs underlying price pressures are firming—but it would take several more months to ease concerns about weak inflation.
- Consumer sentiment rebounded in July to its highest level this year. The Conference Board’s index of consumer confidence suggests Americans remain upbeat about the economy despite slower growth and persistent trade tensions.
WHAT TO WATCH TODAY
The ADP jobs report for July is expected to show a net gain of 150,000 for private-sector employment. (8:15 a.m. ET)
The U.S. employment-cost index is expected to rise 0.7% in the second quarter. (8:30 a.m. ET)
The Chicago purchasing managers index for July is expected to rise to 50.5 from 49.7 a month earlier. (9:45 a.m. ET)
The Federal Reserve releases a policy statement at 2 p.m. ET and Chairman Jerome Powell holds a press conference at 2:30 p.m. ET.
China’s Caixin manufacturing index for July is out at 9:45 p.m. ET.
TOP STORIES
Start Humming the Theme Song from ‘Jaws’ Now
Yes, a quarter percentage point rate cut appears baked into today’s Fed meeting. But there’s still plenty of suspense. First, how does Chairman Jerome Powell frame the economic outlook and the policy debate? Specifically, watch to see his rationale for the latest cut and if he opens the door to another. Second, will the Fed end the runoff of its $3.8 trillion asset portfolio two months ahead of schedule? Some officials have said they don’t see any reason to change a process set to end in September. But Mr. Powell hinted in June they might stop it early to avoid sending conflicting signals—by easing policy with lower rates while tightening policy with the runoff. Finally, watch to see if there are any dissents—not everyone seems to think the time is right for a cut, Nick Timiraos writes.
The Undeclared Currency War
The Fed has a new board member this week: Mario Draghi. The European Central Bank’s policy rate is already nearly 3 percentage points below the Fed’s, and last week the ECB leader strongly hinted it will soon go further. Fed officials have concluded they can’t permit U.S. rates to deviate too far: A lower European neutral interest rate will cause the euro to fall and the eurozone’s trade surplus to rise. If losing demand to Europe weakens U.S. growth and threatens to push inflation too low, U.S. rates must also drop. In effect, a lower neutral rate in Europe helps pull the U.S. neutral rate down, Greg Ip writes.
Europe’s Economy Stumbles
Europe’s economy is sounding an alarm for global growth. Eurozone gross domestic product advanced at an annualized 0.8% rate in the second quarter, down from 1.8% in the first, Paul Hannon reports. One big cause: German and Italian factories are struggling with rising uncertainty about global trade.
The latest data is a fresh indication that the global economy had a weak second quarter and more ammunition for central banks, including the Fed and the ECB, considering fresh stimulus.
Baby Steps
Chinese and U.S. negotiators met Tuesday and Wednesday in Shanghai looking to overcome mutual mistrust and limited political appetite for a breakthrough. Expectations are low for significant progress. Both sides are looking to the other to demonstrate goodwill, with the U.S. expecting a pickup in Chinese orders for American farm goods and Beijing waiting for Washington to relax restrictions on telecom giant Huawei, Chao Deng reports.
A comprehensive U.S.-China deal could help both economies. For now, the latest truce may have helped China’s manufacturers—a little. An official gauge of factory activity picked up in July, though it remained below the 50 threshold that separates expansion from contraction for the third straight month. Large manufacturers posted gains while small- and medium-size companies, a crucial source of employment, continued to struggle.
Sector Slowdown
The Fed decision is a big deal, but it isn’t the only game in town this week. Friday is jobs day! Economists expect U.S. employers to add 165,000 to payrolls in July, a slowdown from June’s 224,000. Watch closely for where job growth is cooling. Indeed economist Martha Gimbel notes the bulk of the pullback this year has been concentrated in goods-producing industries: mining, construction and manufacturing. Even though these sectors make up a relatively small slice of overall employment, they’ve accounted for about 60% of the jobs slowdown so far in 2019 compared with the first half of 2018. —Sarah Chaney
WHAT ELSE WE’RE READING
Stop blaming America’s poor for their poverty. The main causes are related to the economy’s structure, not bad behavior. “Japanese people are doing everything right—eschewing violence, avoiding drugs, working hard and not having kids out of wedlock. They are following the conservative prescription, as well as or better than any other developed country in the world. And yet still, many of them are poor. This suggests that there is something very wrong with the conservative theory of poverty,” Noah Smith writes at Bloomberg Opinion.
We’ve noted before that the number of $100 bills in circulation outnumbered $1 bills for the first time on record in 2017. The gap widened last year. Over the past decade, $100 bills in circulation have more than doubled while singles are up by less than one-third. The International Monetary Fund has a new blog post out summing up some research on the whys: Geopolitical instability (the dollar is a safe asset and the dominant international reserve currency) and illicit activity.
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