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Fed: towards a third interest rate cut, then?



"The Fed has no idea what is going on!" Still under pressure from Donald Trump, the US central bank (Fed) closes its monetary meeting on Wednesday, which is to lead to further rate cuts … but this is not enough for the US president.


President of the US Central Bank, Jerome Powell, is expected – here July 31, 2019 in Washington – to announce a slight fall in interest rates in a less favorable environment (AFP / ANDREW CABALLERO-REYNOLDS)

The US Central Bank (Fed) is preparing to lower interest rates for the third time in a row, in line with markets, as growth in the US is slowing down but resisting better than expected.

The first official US GDP estimate for the third quarter, published on Wednesday before the Fed meeting closed, showed an increase of 1.9% on an annual basis, confirming the slowdown started in the second quarter (2%).

Despite this decline, however, the growth of the world's largest economy is much better than expected by analysts, who expected growth of only 1.5%.

High consumption expenditure (+ 2.9%) and a rebound in the real estate market (+ 5.1%) helped offset the decline in business investments.

Employment is still dynamic. According to an ADP survey published on Wednesday, there were only 125,000 jobs in the private sector in October, which exceeded expectations.

On the monetary front, market players almost unanimously expect the Fed to lower its night rate by a quarter of a percentage point (0.25%), which will now fall between 1, 50% and 1.75%.

It will be the third rate cut in three months presented as "insurance" against trade uncertainty and a slowdown in global growth.

But President Donald Trump, who has definitely broken the tradition of respect for distance and independence from the powerful Central Bank, still demands even lower rates and even zero.

Trump took the Fed and its leader, Jerome Powell – whom he called – as his favorite scapegoat on the front of the economy when growth slows down and he is campaigning for re-election.

The Fed "does not fulfill its obligations if it does not cut rates, and even if it does not stimulate" the economy, it criticized the hot president last week.

"We have unlimited potential, limited only by the Fed," added the White House host on Twitter on Tuesday.

Dissatisfied with the strong dollar, which paralyzes US exports during the trade war with China, and which raises the cost of debt, Trump advocates zero rates, as in Europe.

But if the Fed has given impetus to further expansion by lowering interest rates twice since July, it doesn't want to lower the cost of credit to zero, while US growth is still supported.

– One meeting after another –

A third drop in interest rates by a quarter, however, seems to be purchased on Wednesday, in line with the evolution of futures prices. Darker for the future.

"They know that everyone will wonder if they will send a signal that these declines have ended for now, or whether they will operate on a fragmentary basis, one monetary meeting after another," he said. asks David Wessel, an expert who follows the monetary policy of the Brookings Institution.

Jerome Powell described these cuts as "mid-cycle adjustments", referring to three declines in 1995 and again in 1998 that supported expansion. Also this time this series of declines may end at three.

Because the Fed wants to be careful and not abuse monetary weapons when the economy doesn't really need them.

The expansion of the United States will proceed twice as fast as in the euro area throughout 2019, according to IMF forecasts, at 2.4% against 1.2%.

The head of the Fed must also deal with the monetary commission (FOMC) divided from the beginning in relation to this series of interest rate cuts. Some members are concerned that an overly favorable attitude will promote market efficiency and pose a risk to financial stability.

Earlier this week, influenced by expectations about the Fed and corporate profits, the S&P 500 on Wall Street, considered by investors as the most representative, reached a new level.

Three FOMC members voted against the decision to lower rates in mid-September, two because they considered it unnecessary, one because they would like a larger decline.

vmt / dt / FC


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