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Has the Fed stood up?

20 September 2019

After having cut rates in July by a quarter of a percentage point, the Federal Reserve (Fed) has lowered its benchmark rate this week by another 25 basis points, to a range of 1.75% to 2%.

The decision to cut rates was made in order to stimulate the economy amid trade uncertainty and growing global headwinds. In its statement, the Fed reported, "although household spending has been rising at a strong pace, business fixed investment and exports have weakened". The labour market remains strong, economic activity has been rising at a moderate pace and strong consumer spending has offset slowing business investment. However, they stopped short of making a clear commitment to further easing. Chairman of the Fed, Mr. Powell said, "It can be a mistake to hold on to firepower before a downturn gains momentum", and mentioned that the Fed is prepared to be "more aggressive", should the economy weaken further.

The Fed decision drew an immediate attack from President Donald Trump, who tweeted:

"Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!" - Donald J. Trump (@realDonaldTrump) September 18, 2019.

Trump tweeted last week that he would like the Fed to cut rates to "ZERO, or less" to help the US compete with countries where borrowing costs are lower and their currencies weaker. The median projection from the Federal Open Market Committee (FOMC) members following the latest cut was that rates would remain at this level until the end of 2020. More surprisingly, the range of individual views was extreme, as seven members voted to raise rates next year, whilst eight members voted to lower rates by another quarter percent. Given the breadth of views, further rate cuts appear more difficult; in fact, the median prediction for 2021 show that the latest cut is projected to be reversed.

Whilst the Fed has decided to cut rates, future policy expectations continue to indicate that the Fed is convinced this is simply a mid-cycle correction and only moderate accommodation is required. It appears as though they have stood up against the barrage of criticism levied against them by their own President for more decisive action, but not quite in the way President Trump wanted. Having accused them of sitting, and sitting, and sitting, the Fed appears to have done just that, by carefully analysing the economic and financial data to make independent decisions as a central bank should.

Sources

Fed statement: https://www.federalreserve.gov/newsevents/pressreleases/monetary20190918a.htm

Trump tweet: https://twitter.com/realDonaldTrump/status/1174388901806362624

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