This is the most important event of this week and probably one of the most important this year. On Wednesday, the US central bank is likely to cut interest rates in the US for the first time in over a decade. The market somehow forced this action on bankers in fear of the coming slowdown and even recession. What Jerome Powell will say, the Fed's chief will be of great importance to investors' behavior in the second half of this year.
The Fed cut interest rates for the last time to 0.0-0.25 percent. in December 2008, thus ending the cycle of cuts that lasted from September 2007, which was supposed to first save the slowing US economy, and later was only a post-factum response to the frenzied financial crisis that shook markets around the world.
The interest rate cut by the Fed is almost certain
Currently, the situation looks a bit different, although there are plenty of votes about the impending recession in the United States. The most reasonable of them is the indicator of the New York branch of the American central bank – the Federal Reserve – which, among others, o The US debt yield predicts the probability of a meltdown in the next 12 months. At present, the indicator is already at a level that has historically ill-defined the approaching collapse.
The New York branch of the Fed, which publishes the recession risk indicator in the next 12 months, reached 33 percent. And that means that the recession in the US may be fast approaching.
What's more, the Fed will also have to face the weakening macroeconomic indicators. On Friday, we learned that the rate of economic growth overseas decelerated to 2.1 percent. k / k saar vs. 3.1 percent. k / k saar in the first quarter of 2019. Although it was a much better result than assumed by the market consensus (1.8% q / q saar), the GDP growth rate was the slowest since the time when Donald Trump lived in the White House.
GDP growth in the US and the Fed's performance
A positive surprise was still very strong private consumption, which means that Americans do not experience any major problems in their pockets yet. Public spending did not fail. However, it was worse with investments.
– Investment activity has clearly weakened – investments excluding real estate decreased by 0.6%. k / k saar, with potentially significant share of lower investment in the mining sector – comments from the economists of PKO BP.
– GDP data were very specific – on the one hand, the increase in private consumption (let's add: after a very weak first quarter) is the most positive thing, on the other, there was nothing more positive about this data. Public consumption was growing strongly, which is unsustainable, while trade and investment have limited growth. Clearly, the American consumer is far from panic, however, data on business activity and trade shows that global problems affect the US – in turn, Przemysław Kwiecień, chief economist at XTB.
According to him, the Fed could in this situation simply abstain from the actions, but under enormous political and market pressure will decide to cut rates by opening the door open for possible further action.
– On the market, such a move will depend primarily on whether the global economy's problems can be resolved. In the previous two cases, the first rate cut in the cycle was a prelude to the stock market bear market, because the situation was too difficult for the central bank to be able to mask it – April claims, adding:
However, there is optimism on the market that the current situation can be compared to the 1990s, even until the year 98, when the Fed lowered rates in response to the collapse of the LTCM fund, the US economy was quite resistant to global turmoil (they also had their center in Asia ) and a bull market was launched, which tripled the NASDAQ technology quotes in 2 years (the largest post-war stock bubble)!
Let us not kid ourselves, loosening itself, especially after years of low rates, will not change the global economy. However, depending on what the economy shows, it can have a huge impact on the markets.
Fed under pressure
In sum, it is almost certain that the FED will lower interest rates this Wednesday, but the most important thing will be what will happen at the press conference, which may give guidance to the markets on how to further loose monetary policy across the ocean.
– According to us, the Fed will cut rates by 25 bps in July, but the planned pace of activity in the coming months may not meet market expectations. If this happens, the EUR / PLN could still rise, especially if the dollar gains after FOMC decision (equivalent to the Polish Monetary Policy Council – note). We do not expect the rate to leave significantly from 4.27. We do not think that the result of the FOMC meeting will cause that the global market rates will return to the downward trend – experts Santander Bank Polska predict.
One thing is for sure. Every action of the central bank in the US will not escape the attention of President Donald Trump, who has long criticized the behavior of bankers, calling them irresponsible and devastating economic growth. His last Twitter entry on Monday confirms that the main tenant of the White House will still try to keep pressure on Jerome Powell to make money in the US not expensive.
"Fed raised (foot – note) too soon and too much up" – wrote the millionaire. We will know the decision of the Federal Reserve on Wednesday at 20 Polish time. At 20.30, the head of the American central bank will approach the microphone. As always, every word of it will be closely followed by investors around the world.