FEDERAL RESERVE Chairman Jerome Powell, who’s noncommittal about further interest rate cuts, is facing new pressure to make a third-straight reduction in response to weakening data, volatile markets and a continued bashing from President Donald Trump.

Markets placed about a 75% chance of a quarter-point rate reduction at the Oct. 29-30 meeting, up from 40% on Monday, after manufacturing and employment figures slumped this week. US stocks tumbled to the lowest since August as fears of a recession increased.

“The flow of the data has increased the case for a rate cut in October notably and markets are pricing it in that way,” said Joseph Song, senior US economist at Bank of America Corp. “If the data continue to come in weak, that could get moderates and hawks to come on board to provide some sort of buffer for the economy.”

Chicago Federal Reserve chief Charles Evans said Thursday the latest data haven’t yet convinced him to cut rates again. In a Bloomberg interview in Madrid, the often dovish policy maker said he’s open minded about the decision.

Powell told reporters after the central bank’s meeting Sept. 18 that the Federal Open Market Committee would decide rates “meeting-by-meeting,” and further cuts would depend on incoming reports. At that time, just seven of 17 policy makers projected any more cuts this year. Powell described the reduction as insurance against a 10-year-old expansion falling into recession.

But the outlook has somewhat darkened since then, and particularly this week.

On Tuesday, a key factory index fell to a 10-year low as businesses hold back investments amid tariffs and the US-China trade war.

And the ADP Research Institute on Wednesday showed hiring at US companies cooling. Quarterly sales reports from General Motors Co. and Ford Motor Co. also added to concern, sending those stocks lower.

TREASURIES FALL
The two-year US Treasury yield fell to 1.48% Wednesday from 1.55%, reflecting expectations of lower Fed interest rates. The 10-year Treasury yield fell for a fifth straight day as it pushed below 1.6%.

“The tightening in financial conditions the past few days is putting more pressure on the Fed to ease again,” said Sarah House, senior economist with Wells Fargo & Co.

Trump again blamed Powell after the manufacturing data showed declines even though economists attribute the slowdown in large part to the trade wars.

The president tweeted Tuesday that the “pathetic” Fed has kept rates too high, leading to a rising dollar that hurts American manufacturers.

“They are their own worst enemies, they don’t have a clue,” he said.

While Fed officials say they are not moved by criticism from the president or other officials, they are attuned to changes in the data.

New York Fed President John Williams said the outlook was for “slower US growth,” which he attributed to “the effects of the trade tensions and other geopolitical tensions.”

Richmond Fed President Thomas Barkin said he’s watching to see if weak confidence in the outlook “which we know has hit businesses now is starting to hit consumers.”

“Fed officials for the most part are trying to communicate that they want to be in a wait-and-see mode, but markets aren’t interested in that message,” said Stephen Stanley, Amherst Pierpont’s chief economist. “Remains to be seen whether Fed officials will change their tunes.”

While this week’s reports have disappointed, most recent data outside of manufacturing have been mixed and growth during the third quarter is tracking about 1.8%, according to the Atlanta Fed’s estimate.

On Friday, the Labor Department will report payrolls and the unemployment rate for September, which could be key to the Fed in evaluating the outlook, said Northern Trust economist Carl Tannenbaum.

“The Fed might want to put the cuts in place in quick sequence — not much to gain from waiting,” said Roberto Perli, a partner at Cornerstone Macro LLC.

“Recent data and the drop in stock prices probably help in bringing around some of the skeptical committee members. The leadership might use the shift in market expectations to push for a cut this month as well.” — Bloomberg

JAPAN’S regional banks, desperate to shore up waning earnings, are making risky bets that could blow up in the next economic downturn.

In search of returns squeezed by negative interest rates, local lenders have been boosting real-estate and small-business loans that led bad-debt costs to triple last fiscal year. And with their holdings of Japanese government bonds falling to about half the levels of five years ago, they are increasing exposure to foreign assets.

In a sign the risks are building, Moody’s Investors Service recently said it may downgrade a dozen regional banks on concern that they can’t maintain profits without lending to weaker borrowers and investing in more volatile assets. Days later, the 104 year-old Shimane Bank Ltd. raised emergency capital to clean up its investment portfolio and expand lending to riskier local firms.

Japan’s rural banks “can make profits only under the most benign conditions for credit quality, and these will not continue indefinitely,” said David Marshall, an analyst at CreditSights Inc. They’re ill-prepared for any crisis because “they are not pricing appropriately for risk.”

Lenders are being blighted by years of depopulation and urbanization that’s leading to the demise of rural communities. The nation’s financial regulator is pressing them to overhaul their business models and speed up consolidation.

Net income at the nation’s more than 100 local lenders fell to a seven-year low in the year ended March, according to the Financial Services Agency (FSA). About one in four of them have reported losses in their core lending and fee businesses for at least five years running, the most recent FSA figures show. To make up for that weakness, banks have been relying on gains from sales of their equity and bond holdings, leaving them at the mercy of swings in financial markets.

Over the past few years, banks enjoyed moderate bad-loan costs as low interest rates and a steady economic recovery curtailed defaults. That helped lenders claw back excess loan-loss provisions and book the cash as profit.

More recently, however, credit costs have surged as banks increased loans to riskier borrowers. According to CreditSights, regional banks’ provisions still only amount to 0.13% of loans, below a normal level of around 0.25%, but if they rise to 0.5% — a possible scenario in a serious downturn — that would push them into losses.

Regional banks have been increasing domestic loans at a much faster pace than their larger peers in Tokyo, creating a 205.6 trillion yen ($1.9 trillion) pile on which they may have to take the higher provisions. Yet they have very little to show for it, thanks to the drop in interest rates. Their combined net interest income reached the lowest in more than a decade last fiscal year, FSA figures show.

Japanese banks have a lower average net interest margin than their European peers, even though both markets are contending with negative rates. And there’s a risk that rates may fall even further below zero, with Bank of Japan Governor Haruhiko Kuroda saying in September that he had become more inclined to add stimulus.

“With a recovery in net interest income not in sight and credit costs on the rise, regional banks are in a tough earnings environment,” said Toyoki Sameshima, an analyst at SBI Securities Co.

Japan’s Topix Banks Index of shares has slid 3.9% this year, compared with a 5% gain in the benchmark Topix.

Dangers are mounting abroad, too. Japanese banks traditionally parked their excess deposits in the nation’s bonds to collect a modest fixed income. That all changed in 2013, when the Bank of Japan escalated its campaign of buying bonds to revive the economy.

As domestic yields tumbled, lenders reduced their holdings and stepped up purchases of assets such as foreign bonds, leaving them exposed to risks ranging from currency fluctuations to changes in interest rates.

What’s more, many assets accumulated most recently are reported as “other” securities, adding a layer of opacity to the banks’ risk-taking. CreditSights says this item includes structured products and investment trusts, which consist of anything from corporate bonds to overseas stocks. — Bloomberg

ST. LOUIS — It is “inevitable” that central banks including the US Federal Reserve will start issuing digital currency, Philadelphia Federal Reserve bank president Patrick Harker said on Wednesday, while cautioning that the United States should not be the nation to lead such a move.

“Frankly I don’t think we should be the first mover as a nation to do this,” Harker said at a community banking conference here, given the dollar’s role as the world’s reserve currency and the need to test out new technology. But he added: “It is inevitable … I think it is better for us to start getting our hands around it.”

His comment came in response to a question about the Fed’s decision to create its own real-time payments system.

Harker said with the so-called “FedNow” service in the works, “I am looking at the next five years after that. What comes next? I do think it is something around digital currency.”

The Fed and other central banks are debating both how to approach the rise of privately issued cryptocurrencies like Bitcoin, and examining how the underlying blockchain technology might change traditional central banking.

The general mood is skeptical — about whether private cryptocurrencies will ever become large enough, or behave enough like true currencies, to require regulation, or to threaten the ability of traditional central banks to conduct monetary policy.

“We’re a long way from that,” Fed Chair Jerome Powell said in June, describing the technology as in its “infancy.” Other Fed officials have said that the benefits of a central bank issued digital currency were “not obvious.”

But there is also concern, particularly over Facebook’s potential to pull a large financial consortium together behind its Libra initiative.

And globally, other central banks and institutions including the Bank for International Settlements have begun to take the possible spread of central bank digital currencies as more of a possibility.

Harker acknowledged his view was “in the minority” at the Fed right now.

But his staff has begun research on the issue, and he said he is organizing a small research conference for academics to be held early next year. — Reuters