Business spending has slowed. Estimates of second-quarter gross domestic product saw a decline in business investment, a sign of elevated uncertainty. This month, the U.S. manufacturing Purchasing Managers’ Index (PMI) fell to 49.1, the first sign of contraction in over three years. And in the near future, the effects of fiscal stimulus, particularly the Tax Cuts and Jobs Act of 2017, will fade. A lower-rate environment can help to offset the loss of momentum.

Rates are falling worldwide, with the U.S. standing out for its relatively high yields. There is clearly still investor appetite for safe, lower-yielding debt. However, there is no requirement that rates must align internationally.

Inflation remains below the Fed’s target, despite robust economic activity. The economy has not been able to sustain 2% inflation amid low unemployment and elevated consumer activity. Earlier this year, there was speculation the Fed might cut rates to help achieve its 2% inflation target. We found those rumors to be a bridge too far. While we do not expect the Fed would act solely to meet an inflation target, it is one more reason to ease.

The yield curve would certainly benefit from more Fed action. The spread between three-month rates and ten-year rates has been inverted for most of the past four months; cutting rates would help to normalize the yield curve by lowering the short end, minimizing recession worries that can become self-fulfilling.

Finally, market expectations must weigh on the Fed. Futures markets are skewed toward cuts. The Fed has no mandate to appease markets, but it does not want to cause a panic through surprises, either. Fewer rate cuts may mean tighter financial conditions if the market re-sets expectations.

Next week’s meeting will include an updated quarterly Summary of Economic Projections (SEP), in which FOMC members share their outlook for the Fed Funds rate, economic growth, unemployment and inflation. The June 2019 SEP was notable for its reduction in the projected interest rate path. We will watch closely for any sign that the committee members fear a downturn is coming, a precondition for further cuts.

We expect dissenting votes will be the norm for this and most future decisions. The June decision to hold the rate steady included a dissent from an FOMC member who wanted a cut; the July cut had two dissents from governors who preferred to hold. Recent public statements by Fed officials have revealed no consensus. We view the dissents as a healthy sign of a deliberative body at work. 

We are hopeful that Powell’s remarks will be well rehearsed. At the July press conference, the Fed Chairman caused confusion by referring to the rate cut as a “mid-cycle” adjustment, a term the media and analysts had not heard previously. In December 2018, Powell characterized the Fed’s balance sheet reduction as running “on autopilot,” which markets interpreted as the Fed ignoring market signals. Markets performed poorly thereafter.

We do not envy FOMC members’ jobs at this point in the cycle. With so many arguments for and against any decision, criticism will surround any action. Please follow us on Twitter for our real-time read on Wednesday’s decision and likely next steps.