The US Federal Reserve decided on Wednesday, September 18, after a two-day meeting, to cut interest rates. According to the Fed's decision, the federal funds rate will be in the range of 1.75-2.00 percent, i.e. 25 basis points lower. This was the second cut in a decade, after the first cut in July.
In addition to the FOMC decision itself, macroeconomic projections and the press conference of President Jerome Powell, who explained the approach of his institution to the economy and monetary policy, were also important. Powell now has a very difficult task to meet the expectations of the market and President Donald Trump, who again criticized the Fed for not doing enough in the current situation. This can be interpreted in such a way that both the US president and investors see the world in much more bleak colors than representatives of the Federal Open Market Committee.
Based on data from the economy, the Fed has no reason to deeply cut interest rates, as the labor market, consumption, consumers and retail sales are doing great. Only inflation remains suppressed, according to the Fed. It is therefore difficult to make decisions on the basis of factors that may or may not have a negative impact on the US economy (trade war), and this seems to indicate quite conservative macroeconomic projections.
According to Fed representatives, we have just seen the last cut this year, as well as the last one in the projection horizon by 2022 at all. 1.9 is the effective Fed rate, which is to be held at the end of 2019 and in 2020. In turn, in 2021 it is to increase to 2.1, and in 2022 to 2.4 percent. The Fed thus lowered the interest rate path against June projections, but that was not enough. Investors probably expected further cuts this and next year. It is worth noting that GDP projections were raised in the absence of inflation changes. The interest rate market nevertheless assumes that by the end of the year interest rates may be further reduced, and the probability of cutting is 58 percent.
After the Fed's decision, there was a very mixed mood on Wall Street. Stock indices recorded losses, but then they were higher. Despite no announcement of further interest rate cuts, Jerome Powell mentioned a possible increase in the Fed's balance sheet again. Also the improvement in economic growth forecasts could have been a positive surprise. In turn, the US dollar slightly strengthened against the main currencies, and the volatility compared to last week's decision of the European Central Bank was very limited.
To sum up, until the Fed sees the real impact of the trade war on the deteriorating economic data, including the decisive deterioration in the labor market, it can still resist political pressure from Donald Trump and markets that count on cheap money, however according to The Fed they are not entirely justified by the economic situation.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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