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Fundamental analysis

Fed cuts rates as “mid-cycle-adjustment” to global “uncertainties”

Squared Direct | Aug. 1, 2019
Fed cuts rates as “mid-cycle-adjustment” to global “uncertainties”

According to Fed Chair Jerome Powell, this may not be the beginning of a rate cut cycle. Powell's post-announcement speech was far more hawkish than most expected.

1 August 2019 |  – In a much-anticipated move, the Federal Reserve cut its main interest rate yesterday by 25 basis points. Fed chairman, Jay Powell, announced that this move is a “mid-cycle-adjustment” rather than a beginning to a new set of monetary easing policies citing “uncertainties” linked to the global economic slowdown, the aftermath of the US-China trade war and other trade tensions globally as reasons behind the move.

The Federal Open Market Committee (FOMC) in a statement accompanying the cut, declared itself ready to “act appropriately to sustain the expansion” which could be a signal for possible future rate cuts but the language currently shows a bias against further easing. The Committee also noted that this rate cut works in conjunction with their decision to stop the reduction in the FED’s balance sheet two months earlier than previously planned. The successful shrinking of the balance sheet is expected to bring Central Bank holdings near pre-crisis levels.  

Fed cuts rates, signals it may need to do one more

Jay Powell did not want to offer any guarantees for at least one more upcoming rate cut but he did hint that it was likely. From the beginning of June, key officials were hinting at an interest rate reduction to protect the US economy against global economic turmoil. Domestic data that the FED finds particularly worrisome include the Q2 slowdown in US growth, weak investment and low-inflation that runs constantly below the preset 2 percent target.

Additionally, the Fed stated that it would cut the interest rate it pays to banks for keeping their reserves at the central bank from 2.35 percent to 2.10 percent to further stimulate lending and increase money flow and liquidity in the economy. Fed officials are not anticipating a severe decline of the US economy that would merit a more forceful cycle of easing policies. They stated that the “labour market remains strong and that economic activity has been rising at a moderate pace.”

According to the most recent median projection for economic growth, published last month by the Fed, the US economy is expected to grow by 2.1 percent in 2019, by 2 percent in 2020 and by 1.8 percent in 2021. The IMF’s forecast, however, has the economy growing by 2.6 percent in 2019 followed by a 1.9 percent growth in 2020.

The reaction of the Markets:

  • Asian equities fell significantly after the cut with both Hong Kong Hang Seng Index and China’s CSI 300 down by 0.5 percent
  • S&P 500 ended lower at 1.1 percent and the US dollar rose to 0.4 percent against the other currencies
  • Dow Jones fell more than 300 points and lost 1.2 percent
  • The two-year Treasury yield was 6.5 basis point higher than the 10-year yields

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