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23 July 2019

Has the Fed been bullied into cutting rates?

Addressing Congress last week, US Federal Reserve (Fed) Chairman Jay Powell flagged ‘insurance’ rate cuts later this month. Despite continuing resilient US job reports, global economic growth and the US-China trade war continue to be of concern for the Fed and strengthened the case for a rate cut. Meeting minutes released by the US central bank indicated that “Fed officials appeared concerned that inflation continues to run below 2% target, which is seen as another rationale for a cut in interest rates”.
 
If the US and global economies were to significantly falter in the next few months, due to President Trump’s ongoing trade disputes, monetary policy easing would be the right action to take to protect the US economy.
 
During his address to the committee, Mr Powell said “Economic momentum appears to have slowed in some major economies, and that weakness could affect the US economy. Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit. And there is a risk that weak inflation will be even more persistent than we currently anticipate.” Following the statement, investors are betting that the Fed will cut interest rates by 25 basis points by the end of July, from the current level of 2.25-2.5%. The move by the Fed has drawn criticism, with some analysts citing that it is being pressured by Donald Trump – who has been openly pushing the US central banks to cut rates to boost economic growth.
 
As trade tensions continue between the US and China, second-quarter data has shown that China has produced its slowest rate of growth in 30 years, indicating stimulus may be required before the end of the year to reach the government’s growth target of 6%. Larry Hu, leading economist at investment bank Macquarie, said: “We expect stimulus to escalate around 4Q19, when policy makers would put economic growth as the top priority again. At that time, they would lower interest rates to support the property sector, loosen regulation to boost infra spending, and roll out measures to stimulate consumer durable goods such as auto and home appliance”. Domestic growth remained robust, with retail sales growing 9.8% in June and industrial performing well, but since 2018 China has seen a steady decline in its exports.
 
China maintains its argument that its economy is strong enough to withstand the continuing trade war. The World Trade Organisation (WTO) has announced that some of the imposed US tariffs on Chinese goods do not comply with current rules in place; this could be the catalyst for China to further push back against the US.

The cut in US interest rates could see the pound strengthen against the Dollar, which would not necessarily be good for FTSE constituents which usually benefit from a strong Dollar.

Please contact your usual Redmayne Bentley office if you wish to discuss this further.
 
Victoria Hill | Assistant Investment Manager
 
Has the Fed been bullied into cutting rates?
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