Explainer: Five ways the Fed's expected rate cut could affect consumers

18 Septembre, 2019, 20:21 | Auteur: Auguste Feret

Rate cuts usually boost stocks, and with American stock markets near record highs already, policymakers might be mindful of committing to more easing, for fear of unnecessarily juicing asset prices towards "bubble" valuations.

A top challenge: making sense of economic data that suggests the USA manufacturing industry may be contracting and inflation remains weak, even as households continue to spend and employers overall are adding plenty of jobs. A belief that oil prices will remain elevated and that inflation might finally be reaching the Fed's target level have reinforced that perception.

When prior recessions hit, the Fed's interest rate was above 5 percent, allowing the central bank to cut swiftly - and deeply - but there's concern that the Fed's best tool is blunted this time around since rates are already so low.

Rosengren voted against the July cut and is expected to vote against lowering rates this week. Britain is scheduled to leave the trading bloc on October 31 and might not have a deal in place that regulates trade and other issues with European Union nations.

The ongoing U.S. -China trade war makes Dallas Fed President Robert Kaplan among others concerned about slowing factory output and a slide in business investment. "So as we look ahead we have to worry that some of our biggest customers are going to be buying less, so we have to offset that by cutting interest rates here". For example, the new "dot plot" may not indicate a consensus for more cuts this year, or Powell could play down the need for more easing in his press conference, highlighting instead that the central bank will act only if the outlook deteriorates further.

Trump's sniping at the Powell Fed hasn't let up.

Fed Chair Jerome Powell, seated midway down the table, faces the delicate task of taking on board those views and the disparate arguments of the other dozen policymakers to build consensus.

Almost all economists outside the administration view that idea as unwise if not reckless.

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Trump said China thinks he was going to win the elections and are concerned about it. "They think I'm going to win". Tariffs on automobiles are a critical issue to both countries and has been source of delay in their trade talks.

The most serious threat to the expansion is widely seen as Trump's trade war.

But the deep divide evident around the Fed's policymaking table means further rate cuts could be far from a done deal, and on Tuesday traders were no longer betting the central bank will follow Wednesday's expected rate cut with another by the end of the year. Yet most analysts foresee no significant agreement emerging this fall in the conflict, which is fundamentally over Beijing's aggressive drive to supplant America's technological dominance.

Energy shares fell broadly after Trump told Treasury Secretary to "substantially increase" sanctions on Iran after a series of attacks targeting Saudi Arabia's oil production.

So far, most economists say the temporary loss of Saudi production won't end up hurting the USA economy, primarily because there remains plenty of global supply. "Fed communication since the July meeting suggests unchanged motives for further easing, including a slowdown in the industrial sector on the heels of slower growth momentum overseas, increased uncertainty from trade and other geopolitical tensions, and persistent below-target inflation", Barclays analysts said in a note. "That could spook markets if he's implying he might be done with rate cuts".

The RBA published its latest meeting minutes report during yesterday's Asian session, and notably indicated that it was prepared to keep easing monetary policy as necessary. The job market is essentially healthy, and wages are rising. An index of consumer sentiment produced by the University of MI has rebounded.

"They have to react to policies that can change with the speed of a tweet", said Diane Swonk, chief economist at accounting firm Grant Thornton.

The Fed's updated economic and interest rate projections, to be released Wednesday, will provide clues on the path forward.

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