Near-Term Fed Rate Cut Called into Question

Darnell Taylor
June 26, 2019

In a speech at the Council on Foreign Relations in NY on Tuesday, Fed Chairman Jerome Powell said the Fed doesn't base its policies on market expectations or political pressure from the administration.

Separately, St. Louis Fed President James Bullard told Bloomberg Television he does not think a cut of half a percentage point is warranted when the policy-setting Federal Open Market Committee meets again in July, even though he pushed to lower rates last week.

Trump insisted that Powell "has to lower interest rates for us to compete with China".

Also on Tuesday, St. Louis Fed President James Bullard, who argued for a rate cut at last week's Fed policy meeting, said he does not think the USA central bank needs to cut interest rates by a half-percentage point at its next meeting on July 30-31.

"The question my colleagues and I are grappling with is whether these uncertainties [over trade disputes and weak inflation] will continue to weigh on the outlook and thus call for additional policy accommodation", Mr Powell said. "And they have Draghi who is - we should have Draghi instead of our Fed person", Trump said in response to whether he is working on a deal with Europe, during an exclusive interview with FOX Business' Maria Bartiromo.

The Fed has recently downgraded its estimate of a neutral rate down to 2.5 per cent - suggesting its current policies aren't supporting or stifling the pace of GDP growth.

The president said that while he did not threaten to demote Powell, he did note that he has "the right" to both demote and fire him. "After last week's meeting, hopes for a rate cut took off and that might not be in the picture next month".

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Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., June 4, 2019. -China trade talks broke down.

Trump's moves sent financial markets tumbling because of concerns the trade conflict could end the current 10-year economic expansion, which in July will become the longest in US history.

He said many FOMC participants judge that "the case for somewhat more accommodative policy has strengthened".

"Our expectation is that there will be some sort of trade truce or some goodwill signs coming out of the G20 meetings between Donald Trump and (Chinese President) Xi Jinping", said David Kelly, chief global strategist at JPMorgan Funds.

Earlier this year, economists believed the Fed would keep its key policy rate unchanged all year long after four rate hikes last year.

The Fed, which paused its rate-hike campaign this year and suggested last week that it could cut borrowing costs as early as next month amid concerns about USA trade disputes and other economic risks, is facing increasing anger from Trump.

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