Fed makes second straight rate cut, splits on further action

Thursday, 19 Sep, 2019

Donald Trump may have lost faith in Jerome Powell but the stock market hasn't.

The cut was immediately criticized by Trump, who last week said the Fed's "boneheads" should reduce rates to zero or lower.

The Fed's decision to lower rates on Wednesday followed a similar cut in July and marks a reversal from its policy only a year ago, when America's healthy economy had convinced policy makers to enact a series of small hikes.

Federal Reserve policy makers lowered their main interest rate for a second time this year while splitting over the need for further easing, caught between uncertainty over trade and global growth and a domestic economy that's holding up well.

"Trade developments have been up and down and then up, I guess, back up perhaps over the course of this interview", Powell said in a reference to Trump's sometimes unpredictable trade war with China and, on occasion, other countries.

Yael Selfin, Chief Economist at KPMG UK warns this could be another indicator that UK growth is slowing: "The falling inflation rate could be an early signal of a cooling economy, in line with what we have seen in the United States and the euro area".

Investors will be pouring over the Fed's fresh round of "dot plot" projections, which map out policymakers' views on where rates could be by the end of this year and next.

Seven members of the Federal Reserve Open Markets Committee, which sets the rates, voted in favour of Wednesday's cut, including Federal Reserve chair Jerome Powell. There were 3-dissents. Two of those dissents were for not interest rate cut at all and 1, was for a 50-basis point cut. The statement noted household spending had been rising at a strong pace while business investment and exports had weakened. The Dow fell more than 150 points following the Fed's announcement. No "guts", no sense, no vision!

Still, with policymakers meeting this week, it cast an untimely light on the Fed's sometimes rocky transition to a new system for managing interest rates and on debate over the appropriate size of its $3.8 trillion balance sheet.

Which way the Fed might go from here is far less clear cut. Powell has said that the policymakers remain focused on sustaining the expansion and keeping prices stable without regard to any outside pressures.

The Fed is also monitoring the global slowdown, especially in Europe, and Britain's effort to leave the European Union. But the Fed gave mixed signals about what may happen next. They believe inflation will rise closer to their 2% target, the level it considers healthy for the economy.

The most serious threat to the expansion is widely seen as Trump's trade war. Yet most analysts foresee no significant agreement emerging this fall in the conflict, which is fundamentally over Beijing's aggressive drive to supplant America's technological dominance.