Fed interest rate cut: Will Donald Trump get what he wants?
The US Federal Reserve is set to cut interest rates for the first time in 10 years this evening, with the raging trade war with China and signs of slowing momentum darkening policymakers’ moods.
Yet US economic growth is stronger than its peers and unemployment is at record lows, meaning the Fed will likely plump for a small reduction of 25 basis points (0.25 percentage points).
Read more: Traders foresee small Fed interest rate cut
Although traders think there is a 77 per cent chance of a smaller cut, President Donald Trump has made it clear he wants a bigger cut to the main federal funds target rate, which currently stands at between 2.25 per cent and 2.5 per cent.
“The Fed ‘raised’ way too early and way too much. Their quantitative tightening was another big mistake,” he said on Twitter on Monday. “A small rate cut is not enough, but we will win anyway!”
Trump has repeatedly attacked the Fed’s decision to raise the main rate from the post-crisis low of 0.5 per cent in early 2016. He has said the economy would “rocket” if rates were slashed.
How much will the Fed cut interest rates by today?
— City PM (@CityAM) July 31, 2019
Another reason Trump wants lower interest rates is because it devalues the dollar, which makes US exporters more competitive.
Major Fed interest rate cut could trigger US dollar sell-off
Greg Anderson, global head of FX strategy at Canadian bank BMO, said: “We would see a substantial USD sell-off if the Fed cuts its base rate corridor by 50 basis points.”
“Based on market pricing, the Fed is in a difficult spot. If the only thing it does is cut the base rate target range by 25 basis points, markets will be disappointed.”
Kit Juckes of Societe Generale said Trump may “repeat his threat to ‘do something about the dollar’” – he has warned he may find another way to force it downwards – if the Fed does not give him the cut he wants.
Analysts at Blackrock disagree with the President. “In total, the market is pricing in one percentage point of rate cuts in total through the end of 2020,” they said in a note. “We view this as excessive given that the near-term risks of recession appear limited.”
Could a Fed cut damage its independence?
Michael Brown, senior analyst at Caxton FX, said any Fed interest rate cut “would complete the Fed’s shift from ‘data dependence’ to data independence, with economic data seemingly giving policymakers little reason to contemplate loosening policy.”
Fed chair Jay Powell “is likely to frame the cut as an insurance policy against global ‘crosscurrents’,” he said.
Michael Hewson, chief market analyst at CMC Markets, said the almost-certain cut “to all intents and purposes looks like an attempt to mollify a US president who has his own agenda, and who thinks the central bank is a tool for his own political ends”.
Read more: ‘Faulty thought process’: Fed lashes out at Trump
“Quite simply the current data in no way warrants a rate cut… with trend growth much higher than when the Fed started its hiking cycle and unemployment which is still near multi year lows.”
(Image credit: Getty)