If the Federal Reserve fulfills expectations and cuts interest rates Wednesday, it will have to convince the public it is doing so to preserve economic growth and not kowtowing to a very vocal president who is demanding looser monetary policy.
The Federal Open Market Committee and Chairman Jerome Powell have a delicate balance to strike if they approve what markets are betting is a 25 basis point easing.
If the committee presents a reasoned approach to why a cut is necessary just seven months after hiking, it has the potential to execute the move seamlessly.
But if the perception emerges that policymakers are merely looking to mollify President Donald Trump, then the central bank's credibility, and its veil of political independence, could be torn asunder, resulting in damage that could take years to fix.
After all, the economic signs in the U.S. look good. GDP rose a better-than-expected 2.1% in the second quarter, unemployment is around a 50-year low and consumer metrics, which already had been looking good, are only getting stronger.
Cutting rates has rarely if ever been done in such an environment. Explaining that an easing now is anything but a political move in the face of all of Trump's demands won't be easy — even if Powell and Co. think Trump is right.
"How do you window-dress that? How do you explain your actions other than to say the president's right?" said Fed veteran Christopher Whalen, head of Whalen Global Advisors. "That's tough for that institution to do that."
Whalen thinks Powell should stick to the position he set forth last year, which was to adopt a patient stance, allowing a sizable chunk of the bonds the Fed is holding on its balance sheet to run off before moving on rates.
The Fed has drained about $650 billion in a reduction program that started in 2017, but the portfolio of Treasurys and mortgage-backed securities remains at a lofty $3.6 trillion. Many economists expect the FOMC to announce, along with the rate cut, a cessation of the balance sheet runoff, even though it was supposed to end in September anyway.
"You've got a relatively weak chairman who is getting beaten up by a very volatile president," Whalen said. "For the sake of the Fed and their credibility long term, not just now but long term after Trump is gone, they want to take their time."
Investors should get plenty of clues about where the Fed goes from here in the post-meeting statement, followed by Powell's usual news conference.
Reporters have questioned Powell repeatedly on what influence Trump's criticisms have had. He repeatedly has emphasized Fed independence, which Trump and other White House officials have said they respect even if they disagree with policy. The Fed has approved seven rate hikes during Trump's tenure, and the president has been especially critical of the December quarter-point increase that came amid tightening financial conditions and a wobbly stock market.
The tension, and the ever-present possibility that Trump might one day dump Powell from the chairman's seat, remains a constant overhang.
Yet another administration deputy, Marc Short, who is Vice President Mike Pence's chief of staff, called on the Fed to heed the signal of low inflation to reduce rates. Short spoke Tuesday on CNBC.
"The idea that directives for the Fed or running Fed commentary should come from the vice president's chief of staff I think is a bizarre descent for American democracy," former Treasury Secretary Larry Summers told CNBC's Sara Eisen during a "Squawk on the Street" interview.
"The most important thing that any financial policymaker has is their credibility. If that credibility is sacrificed and their decisions are seen as not based on the facts of the economy but on political pressure, then something hugely important that may be essential when the next crisis comes may be lost," Summers added.
However, Summers, like Whalen, said there is a legitimate case for a cut.
Fed officials are likely to cite several pressing issues that aren't necessarily serving as major macro forces but are overhangs that could slow growth or even pull the economy into recession. They include uncertainty over trade negotiations, the global slowdown and a lack of inflation that negates the need for restrictive economic policy. On top of that, there is a pronounced slowdown in manufacturing as well as corporate earnings that, while not as bad as expected, remain lackluster.
Putting those ideas into a cogent form would help obviate the political repercussions.
"There are definitely economic reasons for thinking that going back on the December rate increase is a good idea," said Peter Ireland, a Boston College economics professor and member of the Shadow Open Market Committee of academics who monitor Fed policy. "So I don't think it's a situation where the Fed's credibility is destroyed by any means."
"I wouldn't say it's a make-or-break meeting for Powell or that this is a once-in-a-lifetime exceptional opportunity. It's kind of more of the same struggling with communication challenges," Ireland added.
Indeed, the markets will be as focused on what the Fed says as with what it does.
Getting the message across properly will mean not committing to a set policy path, said Ed Keon, chief investment strategist at QMA.
Telegraphing a course of cuts would lend itself to speculation that the Fed was obeying Trump. Approving a cut now and committing to the data ahead would help stanch that talk, Keon said.
"To avoid that perception of outside influence, it's important that the Fed say that our future decisions are not on autopilot, that we are going to take an objective, clear look at the data as it comes in to decide where we go from here," he said. "Just reasserting this notion of data dependency, I think it's important to the future of monetary policy."