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Fed to Lower Interest Rates Again

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The FOMC will be concluding its two-day monetary policy meeting this Wednesday. The meeting ends with a release of the monetary policy decision by central bank officials.

Investors will also get to see the quarterly economic projections from the central bank.

The Fed lowered interest rates in July this year by a quarter basis point. This came amid concerns of a slowdown in the global economy and various economic indicators flashing recessionary signals.

The central bank, while cutting rates, noted that it was only an adjustment and ruled out the start of an easing bias. The question is whether the Fed will stick to this rhetoric.

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Investors are expecting another quarter basis point rate cut at today’s meeting. This will bring the US Fed funds rate to 1.75% – 2.00%. It will mark a second rate cut this year amid a mixed domestic economic outlook.

U.S. Fed Funds Rate
U.S. Fed Funds Rate

Payrolls in August Slow, but Trend Remains Intact

So far, the only thing working in favor of the Federal Reserve is the labor market. However, the labor market looks to be slowing down. Despite the payrolls report for August coming out weaker than expected, the data underlined that hiring continued well above trend.

US nonfarm payrolls rose 130,000 in August. The breakeven rate is said to be 100,000. Thus, as long as payrolls continue to remain above trend, the central bank could remain optimistic.

The US economy grew at a slower pace of 2.0% in the quarter ending June 2019. This marks a sharp slowdown in pace compared to the previous quarters. More recently, the ISM manufacturing PMI also fell.

The leading indicator fell below the 50-level for the first time in three years, registering 49.1. The contraction in August ended a 35-month expansion in the index.

Will Powell Change the Fed’s Forward Guidance?

In the July rate cut, the Federal Reserve squashed expectations of an easing cycle. Jerome Powell said that the July rate cut was not the start of an easing cycle but rather a mid-cycle adjustment.

In recent weeks, Powell’s comments have remained inconclusive.

Speaking at the University of Zurich, he said that the central bank will act appropriately to sustain the US economic expansion. He did mention that the economy was facing significant risks citing factors including the global slowdown, trade policy, and weak inflation.

Without giving away too much, the comments from the Fed chair do not yet show a commitment towards easing.

In the previous monetary policy meeting, the Fed came out on the neutral side of the scale. Therefore, it would be interesting to see if there will be a change in the tone from the central bank.

Meeting Comes Amid Trump’s Call for 100bps Rate Cut

Powell maintained in his speech that US growth was still favorable. Powell cited that the US unemployment rate remains well near the 50-year low and viewed that the labor market remains strongly positioned.

However, the Fed and Powell continue to come under pressure from President Trump. Trump tweeted last week that the central bank should lower rates by a full 100 basis points.

The central bank has so far managed to not let the President dictate monetary policy.

Powell also cautioned against the risks of lowering rates too early. He said that lower real neutral rates will be one of the biggest challenges for central banks.

Under the current circumstances, some economists argue that the central bank should either change its inflation targeting from 2% or target inflation over a defined period of time.

But the Fed Chief said that due to the risks of running out of policy space quickly, the central bank was committed to defending its 2% inflation target.

Powell also ruled out the fact that external influences such as politics do not play a role in the central bank’s decision making. This comes following comments from former NY Fed president Dudley suggesting that the central bank refrain from lowering rates to offset the damage due to the trade wars.

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