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A pedestrian walks past the Federal Reserve building on Constitution Avenue in Washington, March 19, 2019.

Leah Millis | Reuters

A Federal Reserve projection on economic growth just weakened substantially, and expectations for a rate cut over the next eight months got a lot stronger.

The Atlanta Fed’s closely watched GDPNow tracker is pointing to a 1.1% gain for the economy in the second quarter, according to a revision posted Wednesday. That comes on the back of a strong first three months that saw a 3.2% gain and is substantially lower than CNBC’s Rapid Update survey, which puts the GDP tracking estimate at 2%.

Disappointing retail sales in April fueled the latest leg down in the Atlanta Fed outlook. The Commerce Department reported Wednesday that sales declined 0.2% for the month against expectations of a 0.2% gain. Along with the retail letdown, industrial production fell 0.5% against Wall Street estimates of a 0.1% gain.

Taken together, the weaker-than-expected numbers took a half percentage point off the Fed’s previous second-quarter estimate.

The drop in the GDP forecast coincided with market expectations that the Fed will be lowering interest rates in the months ahead.

Futures trading now indicates an 80% chance of a rate cut by January 2020, according to the CME’s FedWatch tool. However, the decrease could come even sooner than that — the tool assigns a 51% probability of a move lower in September and a nearly 42% chance of two cuts by January.

Fed officials have been unified in saying they don’t foresee a cut or an increase before the end of the year.

In a speech Wednesday, Richmond Fed President Thomas Barkin said, “It makes sense to remain patient” when it comes to policy moves.

“There’s not a strong case to push rates higher when inflation is under control; there’s not a strong case to move lower when growth remains healthy,” he said.

The Fed’s benchmark short-term interest rate is currently targeted in a range between 2.25% to 2.5%.

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