Growth May Be Too Good for Two Fed Cuts

The U.S. economy is doing fine and Federal Reserve policy makers are likely to cut rates next week anyway. Unless things take a real turn for the worse, though, a second cut may not be in the offing.

Gross domestic product grew at a 2.1% annual rate in the second quarter, the Commerce Department said Friday, a step down from the first quarter’s 3.1% pace. On Twitter, President Trump pronounced the report not bad considering “the very heavy weight of the Federal Reserve anchor wrapped around our neck.”

It was actually better than it seemed at first glance. The second-quarter reading was depressed by an increase in the trade deficit and a reduction in inventories, which together lowered growth by 1.5 percentage points. In the first quarter, those two swing factors raised growth by 1.3 percentage points.

The report underscored the divide that has opened up between confident consumers and worried businesses. Consumer spending grew at a 4.3% annual rate, its fastest pace since the fourth quarter of 2017, while business investment fell 0.6%, registering its first decline since 2015.

Consumers are likely responding to the strength of the job market, which is putting more people at work and raising wages and salaries. But many businesses, particularly those with global exposure such as multinationals and manufacturers, are getting hurt by economic weakness overseas and trade disputes between the U.S. and other countries.

The Fed is worried that business jitters will begin to bleed into other areas of the economy—particularly the job market—which is a big part of why it will likely cut interest rates by a quarter of a percentage point when it wraps up its two-day meeting Wednesday.

Many economists and investors think it will make a second just-in-case cut in September as it seeks to forestall any weakness.

But if the economy is still doing pretty well then, with a continuation of strong jobs and consumer spending data, then the idea that overseas problems might be contagious will be less potent.

The Fed could find other justifications for a cut. Intensifying Brexit perils might be one, for example. An increased emphasis on the need to get inflation up to its target would be another. But if the central bank starts changing its reasons for moving rates, it risks sending a message that it is simply cutting for the sake of cutting.

Testifying before the Senate Banking Committee in mid-July, Federal Reserve Chairman Jerome Powell again signaled that the central bank is ready to cut interest rates later this month. Photo: AP

Write to Justin Lahart at justin.lahart@wsj.com

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