Interest Rate Hints Keep Markets and US Economy Humming

The US economy grew a surprisingly strong 3.1% in this year's first quarter, according to the revised GDP estimate from the Bureau of Economic Analysis (BEA). This was about a full percentage point more than expected by the consensus of economists who track the number. In the fourth quarter of 2018, real GDP increased by only 2.2 percent, and the government shutdown extended into the first quarter of 2019 as well.

Confirmation of the growth rate means the economic expansion that followed the Great Recession remains in place and celebrated its 10th birthday last month. In July, it could become the longest expansion in US economic history.

The previous record holder, the 1990s expansion, was fueled by business adoption of the internet — Amazon opened for business as an online bookseller in July 1994.

The current expansion is often thought of as weaker than those of the past, and perhaps that is largely why it has gone on for so long.

Jerome H. Powell, chairman of the Federal Reserve, said last week that the central bank is weighing whether an interest-rate cut will be needed as trade risks stir economic uncertainty and inflation lags. But he made clear that the institution considers itself independent from the White House and President Trump, who continues to push publicly for a rate cut.

Mr. Powell said the case for a rate cut has strengthened somewhat given that economic “crosscurrents have re-emerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy.”

But he stopped short of saying a cut was guaranteed, noting that the Fed would continue to watch economic events unfold and would avoid reacting to short-term issues. “The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation,” Mr. Powell said at a Council on Foreign Relations event in New York.

The Fed is watching warily as global trade flows slow, manufacturing indexes sag and confidence gauges wobble against continuing uncertainty about a trade war.

Because interest rates are already historically low, the Fed wants to take a risk-management approach to setting policy, fending off any softening in growth before it becomes serious.

That inflation has never sustainably hit the Fed’s 2 percent target, formally in place since 2012, heightens the case for moving pre-emptively — rather than waiting and risking making a move too late. Inflation came in at just 1.5 percent in the year through April.

“That undershoot looks like it might be more persistent than we had hoped, and that is not a good thing,” Mr. Powell said in a question-and-answer session with Neil Irwin, a senior economic correspondent with The New York Times. “It’s another argument, frankly, for providing more policy accommodation.”

Mr. Powell’s Fed colleagues are with him as he watches incoming data warily.

“The economy had solid momentum, but now it’s pedaling against some pretty significant headwinds,” Mary Daly, president of the Federal Reserve Bank of San Francisco, said in an interview with The New York Times on Tuesday. “Let’s watch the next six weeks and see if the data reverse,” and “see how the uncertainty resolves itself as we get more information about trade negotiations, and finally, let’s see what other countries are doing to offset potential weaknesses.”

Ms. Daly, who is not currently a voting member but participates in discussions about rate policy, would not say whether she has projected rate cuts this year. But she said she’s concerned that, with more muted growth, it might take longer to push inflation back toward the Fed’s 2 percent goal.

“The bottom line for me is that I want to sustain the expansion so that we can also push inflation back up to our target,” Ms. Daly said.

Wage growth is showing signs of slowing, and several measures of inflation expectations are softening. That increases the risk that price growth will remain permanently below the central bank’s goal, which is meant to provide a buffer to ward off economy-harming deflation.