If the Federal Reserve follows through on strong hints that it will be cutting interest rates in late July, it will do so in the face of a powerful consumer, a record-breaking stock market and an increasingly difficult case to make for easier monetary policy.
Justifying a policy easing against that kind of a backdrop might be tricky for the Fed, even though markets fully expect a cut this month plus perhaps two more before the end of the year. The central bank is not normally in the business of easing into an economy that is showing few signs of a recession, generally holding fire until more pronounced signs of a slowdown are in view.
But this is not a normal time in the world of monetary policy, and the Fed is likely to follow though despite the solid economic signals.
"It just doesn't smell right given the strength of the economic data," said Chris Rupkey, chief financial economist at MUFG Union Bank. "The consumer is back in a big way. You really have to ask yourself why they are going to cut rates."
Indeed, the latest data points to solid consumers, who accounted for 67.4% of economic activity in the first quarter.
Retail sales rose 0.4% in June, according to Commerce Department figures that easily topped the 0.1% expected gain. On a year-over-year basis, sales increased 3.4%.
"This really takes the cake in terms of just how strong the consumer is," Rupkey said. "The Fed has their story and they're sticking to it. So despite the data, despite the strong jobs numbers, they believe this is an insurance cut. A risk management cut is necessary for two factors: one is the slowing global economy, and No. 2 is the fact that inflation has been below the 2% target for so long. Given those two factors, I expect them to go. If not, you're going to hear a whole lot of ruckus out of the White House."
Fed Chairman Jerome Powell, in a speech Tuesday, outlined a laundry list of factors concerning officials.
Along with the usual suspects — the slowing global economy and the back-and-forth trade battle between the U.S. and China — he also cited debt ceiling negotiations in Congress, a potentially messy Brexit and the Fed's nagging inability to bring inflation up to the 2% target level it feels is healthy in a growing economy.
The chairman repeated his intention to "act as appropriate to sustain the expansion," a phrase seen in the markets as code for an impending rate cut.
His comments were echoed by other officials.
Chicago Fed President Charles Evans, in a CNBC interview Tuesday, cited inflation as his overriding concern that makes him open to "a couple" rate cuts before the end of the year that he said still may not be enough for the central bank to achieve its objectives. Dallas President Robert Kaplan told The Wall Street Journal that falling government bond yields are sending a market signal to the Fed that its funds rate, currently pegged in a range between 2.25% and 2.5%, may be too high.
So while a 25 basis point cut at the end of the month seems baked in the cake at this point, an aggressive easing cycle ahead would run counter to Fed officials' assessment of an otherwise strong economy led by a resilient consumer.
At the June Federal Open Market Committee policy meeting, members repeatedly cited "solid" prospects for personal consumption expenditures, according to minutes released last week. The key for markets, though, was a passage in the meeting summary that said officials "agreed that risks and uncertainties surrounding the economic outlook had intensified and many judged that additional policy accommodation would be warranted if they continued to weigh on the economic outlook."
While the market sees sharply lower rates ahead, economists remain divided.
Still, the Fed is going to continue to get pressure, both from the markets and from an increasingly impatient White House, where the preference for a weaker dollar is in line with the Fed's renewed emphasis on sparking inflation expectations.
Joe LaVorgna, chief Americas economist at Natixis, said there's actually a good case for a half-point cut this month, based solely on the Fed needing to fix an inverted yield curve, meaning that short-term rates are now higher than long-term rates.
The average inversion between the fed funds rate and the 10-year Treasury was 31 basis points in June, meaning "the Fed must do more to rectify the current inversion," LaVorgna said in a note.
"If the Fed does surprise, it will be in the direction of more easing rather than none," he added.