US Fed leaning towards a cut but don’t expect one this week
But chances are it won't happen this week
WASHINGTON: As US President Donald Trump's trade wars drag on, and the global economy weakens, the US Federal Reserve is inching closer to its first interest rate cut in more than a decade.
But investors hoping to see the benchmark lending rate drop this week are almost certain to be disappointed.
After preaching patience and leaving rates untouched since December, financial markets will be watching for a change of tone from the central bank and its chair Jerome Powell and a sign the Fed is ready to step in to boost the economy. Policymakers will hold two days of deliberations from tomorrow and are expected to keep the key interest rate in a 2.25 per cent to 2.5 per cent range.
The Fed raised rates nine times in the last three years as the economy recovered, and officials said they expected the growth to continue. But Mr Trump's tariff policies have shaken confidence and some central bankers have begun to acknowledge a chill in the air.
The consensus is that the Fed is poised to switch directions and begin cutting rates. The only question is when.
Mr James Bullard, president of the Fed's St Louis regional branch, was the first to make the move, saying early this month a rate cut could be needed "soon".
Just days later, Mr Powell opened the door to a possible move, saying the Fed would do whatever necessary "to sustain the expansion".
Then Fed vice-chair Richard Clarida added to the mix the possibility of "insurance cuts" - preemptively lowering rates just in case the economic outlook starts to deteriorate.
WALL STREET RESPONSE
Wall Street welcomed the dovish talk, which drove a recovery in stocks after the rout in May. Futures markets as of Friday were forecasting as many as three cuts for this year, in July, September and December.
"In the old days, we'd have used the language the Fed has an easing bias," said RDQ Economist chief economist John Ryding.
Since the Fed's last announcement at the end of May, the US has continued to send mixed signals. But beyond the strictly economic factors are the political ones as Mr Trump continues to flout tradition, repeatedly hammering Mr Powell and the Fed for undermining his bid to supercharge the US economy.
In an interview with ABC, Mr Trump said he would persist with his criticism because he disagrees "entirely" with the Fed's policy.
"I'm gonna do it anyway because I've waited long enough," Mr Trump said in the interview.
Mr Powell repeated that central bankers pay no attention to political pressure. But criticism of the independent Fed can backfire, pushing officials to resist Mr Trump's preferred course in order to prove they cannot be browbeaten - even if a rate cut is justified. - AFP
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