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Is Fed Rate cut an indicator of a Global Rate Cut spiral?

, September 25, 2019, 0 Comments

The Fed is finally bringing some reason to smile for President Trump by making two continuous 25-bps cut after a gap of nearly a decade. It remains to be seen whether, the US economy moves up “like a rocket ship”, which President Trump referred to if Fed Chairman begins easing of the monetary policy. The not so aggressive rate cut has, however, invited a jibe for Fed Chairman Powell from Trump for two reasons.

One the rate cut has again not been as aggressive as per Trump’s standards and second, the post meeting statement did not carry any signal of a continuous monetary easing rather it speaks of no expectations of further rate cuts. This is in continuation of the previous rate cuts where the Fed Chair had spoken of a rate cut as an “adjustment”. As a quick reaction to this ‘adjustment’ theory and the no rate cut expectation in the future, the markets reacted passively.

The Fed Chair’s view that, there are some factors which needs to be considered before going for an aggressive rate cut, if any, needs applaud as data like Firm jobs market, low unemployment rate, muted inflation and strong household spending could on the contrary push the Federal Reserve to hold rates in the future.

Is it not becoming too obvious or a routine for markets to tumble just by a figment of their imagination about the future, which has increasingly become uncertain, courtesy administrators of today.  Sometimes, it looks as if the intellectual genre sitting in the trading desks has lost their sense of judgements about structural fundamentals and are swayed away by the political pomposity.

If we look from the regulator’s perspective, it has been an agonizing year of the fed Chair and it was only his tenacity which could keep him stay put on his decision and not buzz to the rate-cut rhetoric launched by the topmost authority in the country. Though, it was a little anticipated move now and Fed Chair had indicated a month back that the case of a rate cut is strengthened. But it would be quite pertinent to explore the rate cut decision from the perspective of market turmoil and the period of uncertainty unleashed by Trump’s Trade War with China. The trade war has not only dented the US trade prospects, but also the Global trade. India has also not remained unscathed by Trump’s “unfair” trade blame game policy. Not only India, but countries like Canada, Mexico and Germany are also facing the Trump tweet effect. Trump has gone on records that it was “no longer acceptable” for India to impose high tariffs on US -produced goods.

Though there are different opinions, we believe that the trade war, which has led China to re-orient its growth strategy from Export driven to Consumption driven would be impacting the US more than China. The trade figures speak in favor of China. In 2018, the US exported goods worth $120.3 billion to China, and imported a huge amount worth $539.5 billion of goods. Certainly, the exports are dwarfed by the imports.

While wide anticipated, what seems to have triggered the Fed to change its stance and move in tandem with the Presidential line of thinking is the mix of macro problems listed in its GDP report like the downturns in private inventory investment, exports, residential and non-residential fixed investment, which have caused the deceleration in real GDP in the second quarter. The downturn could have been stronger, but for the offsetting effect by accelerations in personal capital expenditure and federal government spending.

The Fed has always enjoyed the independence, whether it was Alan Greenspan during Bill Clinton or Jerome Powell during Donald Trump. The difference, however, is that unlike the past Presidents, Trump seems to be too desperate to keep the economy running high and stock market roaring. The current rate cut is the regulators response and understanding of the global turmoil and falling inflation.fed-us-rate-versus-inflation

The US inflation has been running low and has touched 1.7% from a high of 2% in Apr’19 and with the GDP also turning down to 2.1% (Q2 2019), it was wise for the Fed to give a positive signal to the market. A rate cut would brighten the chances of spending to go up and inflation to inch to a stable and growth-oriented level of around 2.5-3%.fed-us-rate-versus-inflation

The inflation was the highest in July 2018 at 2.9% and it was virtually during the same period, i.e., second quarter of 2018 that the GDP growth topped at 3.5%. With inflation running low, GDP growth declining, the Fed would have found a fit case for easing of monetary policy.

I would say that it is a move which should be seen in light of Fed’s initiative to provide a succour to the otherwise fragile economy. The rate cut would be providing a line of thinking to the ECB and other regulators as well. The chances of ECB taking a call are quick as it is witnessing a change of guard in the form of a more popular and bolder Christine Lagarde taking over from Mario Draghi. There could be more rate cut moves across the world to support the declining global growth, which as expected begun with Indian regulator announcing a 35 basis points rate cut at its meeting on 7th August 2019 bringing the policy repo rate down to 5.40%. With the ECB deposit facility further going negative by 10 bps to (-) 0.50 and the latest Fed Rate cut, we see Indian regulator further easing rates in the next announcement.