Worst-Case Scenario Economics and the Federal Reserve

After a tumultuous start to the month on Wall Street, it appears August came in like a bear. Whether it goes out like a bull is unclear.

With the Federal Reserve Board’s Federal Open Market Committee holding steady once again on interest rates at its July meeting, pundits and prognosticators are looking to the two-day meeting September 17 and 18 to finally make a move. But the narrative is already shifting from when the Fed will cut rates to why did it take so long.

It is a familiar pattern but one unlikely to make consumers or business owners comfortable. And who knows what it will do to the economy.

While Fed policymakers are keeping their thoughts close to the vest, a growing army of second-guessers and armchair economists are moving past a discussion of what impact a rate cut will have to questioning the timing of the move. Some will undoubtedly play the politics card, arguing the Fed is putting its thumb on the electoral scale while others will castigate the central bank for not being more proactive. And all of them will selectively use economic data and the cryptic statements of Fed Chair Jerome Powell and others to bolster their argument.

Some are pointing to a statement Powell made at the conclusion of the July 30-31 FOMC meeting when he said “…a reduction in the policy rate could be on the table as soon as the next meeting in September.” Beyond the normal Fed caginess when it comes to monetary policy, some will seize on the notion the Fed is waiting until things get really bad before taking the plunge on interest rates. They will argue the Fed has not been seriously considering a monetary policy move and is reluctant to risk overheating the economy and spoiling the chances for that coveted “soft landing” that shines like a holy grail.

While a lot of the commentary will amount to little more than sound and fury signifying nothing, Powell’s statement feels like a local television station teasing some big expose, enticing the audience to stay tuned for the big story.

Of course, an interest-rate cut will be on the table in September. A rate cut or increase is always on the table. That is the main monetary policy level the Fed has and what else are they going to talk about? But by putting that out there, Powell invited the speculative pontificating from the business press that the central bank sat on its hands for too long and let the economy spin out of control.

A soft jobs report and an uptick in the unemployment rate reframed discussion of the economy from optimism for sustainable growth with no recession to a growing consensus the economy is slowing faster than anticipated and the anticipated soft landing is turning into a hard crash.

It’s not hard to see why. The tendency to look at the economy through the lens of impending doom has become the standard for the media. The leap in imagination from economic headwinds to the worst-case scenario is in reality a short trip, made shorter by the need to engage am audience with tales of doom and gloom.

It’s easier to spin stories of impending economic downturns and the possibility that things could get really bad than calmly explain the economic realities at play and wait for things to play out. That’s why the worst-case scenario is so attractive to the “experts” and why it gets the attention from an audience overwhelmed with information.

The problem is, sometimes that worst-case scenario becomes a self-fulfilling prophecy.