Following the broadening of tariffs on imported goods from China by the US administration, there has been increased concern relating to the possible re-occurrence of a global recession.
Although interest rates were held steady last week, the Fed shifted towards a more dovish stance and pointed towards possible interest rate cuts in the future, while also highlighting the presence of increased uncertainties concerning the overall economic outlook.
The Fed’s dovish stance comes amid strident and sustained criticism on its recent policy implementations from US President, Donald Trump, who on numerous occasions, have publically called for the Fed to reduce rates. Trump continuously criticises the Fed to have recently raised rates far too fast and giving China an edge in trade negotiations.
The increased risks of an economic slowdown have also been highlighted by Jay Powell, the Fed’s chairman in a recent interview, whereby he warned that risks to global growth have increased in recent weeks, thus reinforcing expectations that the Fed is likely to trim interest rates soon. Mr Powell also debated that businesses are becoming increasingly concerned about these trade tensions, specifically pointing out towards a consequent drop in business confidence.
As such, markets seem convinced that the Fed will eventually cut interest rates next month. The only questions investors are now debating is to what extent the central bank will trim rates in July and how low it will ultimately last. In line with St Louis Fed president’s recent comments, James Bullard suggested that the chances of a bigger than usual half point rate seem unlikely to occur.
The Fed’s approach to lower interest rates would represent a remarkable policy turnaround in comparison to 2018, whereby interest rates were gradually increased to the current levels of 2.25% - 2.50%. Nonetheless, by March, most Fed officials were no longer expecting interest rate spikes. In this regard, the Fed effectively switched to a neutral stance, implying a patient approach to interest rates in either direction.
However, in the face of a high degree of uncertainty concerning rising trade tensions together with the fear of an economic slowdown, the Fed is seriously considering interest rates cuts. Successful implementation of such strategy would be the Fed’s first downward shift since September 2007.
Throughout his interview, M. Powell also argued that the Fed would not be influenced by short-term political pressures. In an attempt to fully safeguard global growth while simultaneously preventing an economic slowdown, Mr. Powell hinted that the Fed will be moving towards embracing the argument for precautionary insurance interest rates cuts, ensuring that the global economy will continue growing.
This article was issued by Andrew Fenech, Research Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.