What a Fed interest rate cut could mean
US central bank to bow to pressure from Trump and cut rates for first time since financial crisis
The US Federal Reserve is set to cut interest rates this week for the first time since the financial crisis over a decade ago.
Despite the US economy experiencing its longest-running growth streak in over 150 years, near-record low unemployment and record-high equity markets, Fed Chair Jerome Powell is widely expected to announce a cut of a quarter of a percent to 2.25% after a meeting of the central bank’s monetary policy committee on Wednesday.
With traders pricing in the chance of a rate cut at 80%, it would be the first reduction in the federal funds rate since 2008, and “would represent a remarkable reversal from the tightening cycle Powell pursued last year”, says the Financial Times, as he “seeks an insurance policy against a weakening global outlook and rising trade tensions”.
“Donald Trump has been pressuring the central bank to announce a bolder move, however, the latest growth figures suggest a more limited move”, says The Times.
Official figures showed the US economy grew at an annualised rate of 2.1% in the second quarter, slightly better than consensus expectations of 1.8%, buoyed by strong consumer spending.
As to the impact of a rate cut, investment strategist Ivan Martchev writing in Market Watch, says “it is a big mistake to be looking for a top in the dollar, which is what typically happens when the Federal Reserve starts a cycle of interest-rate cuts”.
“It is also a mistake to expect outperformance of emerging markets, which may happen temporarily as those countries tend to benefit from the perception of a weakening dollar due to their long-standing inverse correlation,” he adds.
Anneken Tappe for CNN Business says it “could be the start of a summer rally in stocks,” noting that “lower interest rates make borrowing cheaper for companies, which help business’ bottom lines and boost the stock market”.
“America's economy isn’t exactly on the brink of collapse regardless of whether and by how much the Fed cuts rates,” says Tappe, but “the current economic growth cycle is a decade old and, with looser monetary policy from the Fed, it could go on for longer”.
But not everyone is in agreement. Scott Minerd for Barron’s financial news site says “the consequences of the Fed’s actions in the next week could be with us for much longer than we think, culminating in the next recession and increasing the risk to financial stability”.
“In the meantime, the Fed could be delivering yet another sugar high to the economy that doesn’t address underlying structural problems created by powerful demographic forces that are constraining output and depressing prices” he argues, suggesting instead that “by almost every measure, policy makers should be considering another rate hike, not a rate cut, in anticipation of potential economic overheating from looming limitations on output.”