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Following yesterday's ECB meeting, will the Fed stand up?

13 September 2019

This week the European Central Bank (ECB) announced a new stimulus package, including a rate cut from -0.4% to -0.5% and the relaunch of Quantitative Easing (QE). They also took other measures to boost the European economy and to help banks deal with the effects of negative rates. With lower growth, it now looks as if negative interest rates in Europe will be with us for a very long time. This was mostly expected, but the ECB is living up to these high predictions, and thus the initial response saw European equity markets rise whilst bond yields fell, with Italian yields reaching new all-time lows.

President Trump has criticised the Federal Reserve's (Fed) reluctance to reduce rates while extolling the strength of the US economy. Trump's trade policy has been largely responsible for the slowing manufacturing sector of the global economy. Earlier in the week, he called for zero or negative rates in the US. Following yesterday's ECB meeting, he tweeted the following: 

"European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!"

Next week it will be the Fed's turn to meet and set rates. The decision to cut rates would be in response to weaker trade and a slowing economy. Conversely, should they decide to hold (or 'sit and sit and sit'), this is likely to be in recognition of low unemployment and resilience of the US consumer in the face of these headwinds. Trump's apparent contradictory tweets, talking of a strong economy and calling for a boost from lower rates, confuse the picture, but the Fed is likely to resist the calls for sharply lower rates and only cut by 0.25% next week. The market expects this and a similar cut in October, as well as potentially another rate cut in either December or January. This will still leave the Fed fund target upper bound at 1.5%, well above the level demanded by the President. Even such modest rate cuts may not transpire if President Trump does a trade deal with China and global trade picks up. As far as rates are concerned, his actions may result in fewer rate cuts than he would like. As the election year approaches, he may look to engender a rapidly growing economy and low interest rates, but Jerome Powell at the Fed may frustrate him further. Trump publicly aired his disappointment with the Fed Chair on Twitter last Friday: 

"I agree with @jimcramer, the Fed should lower rates. They were WAY too early to raise, and Way too late to cut - and big dose quantitative tightening didn’t exactly help either. Where did I find this guy Jerome? Oh well, you can’t win them all!"

As a result, we should expect the likely rate cut next week to be followed by a further twitter storm of complaints from the President. As far as Trump is concerned, they may be fidgeting but they are not yet standing up.

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