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What is the Federal Reserve afraid of now?

The CME FedWatch tool, which uses prices of short-term bond futures to predict the Fed’s key interest rate, shows a 100 percent of a rate cut on Wednesday.
The CME FedWatch tool, which uses prices of short-term bond futures to predict the Fed’s key interest rate, shows a 100 percent of a rate cut on Wednesday. AP file | June 15, 2018

For the first time since the Great Recession began taking hold, the Federal Reserve will cut its target short-term interest rate in the week ahead.

At least that’s what the market expects. The CME FedWatch tool, which uses prices of short-term bond futures to predict the Fed’s key interest rate, shows a 100 percent of a rate cut on Wednesday. The only question is by how much — a quarter percent or a half percent? The tool puts the odds of a quarter percent cut at 75 percent.

This should make President Donald Trump happy. He has been critical of the central bank in ways no president has before, even publicly calling for lower interest rates. The likelihood of a rate cut certainly has made investors happy. The S&P 500 has been setting record highs.

All the talk and presidential bullying over cutting interest rates puts the bankers in a precarious position. The Fed’s own words have anchored investor expectation for an interest rate cut at this July meeting. Not doing so would upset convention wisdom and could lead to the kind of market volatility the bank wants to avoid.

But cutting its target interest rate is an explicit acknowledgment that not all is great with the American economy. Unemployment is at a record low, wages are growing slowly, and the economy continues to expand. These are among the conditions that led the Fed to be patient earlier this year. Now that patience comes to end.

Economic growth has slowed, especially overseas, trade tensions have cut into business confidence, and inflation remains stubbornly low. At least that’s what the Fed was afraid of six weeks ago when it last met. Should investors be concerned, too?

Tom Hudson hosts “The Sunshine Economy” on WLRN-FM, where he is the vice president of news. Twitter: @HudsonsView

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