Fed's hint at rate cut boosts global markets

Jeannie Matthews
June 7, 2019

The "Beige Book" contained economic report from 12 federal reserve districts, which were each monitored by a regional federal reserve bank. But now the president has thrust the fate of the economy into the hands of the organization - and the man - he has suggested he doesn't trust.

"We are closely monitoring the implications of these developments for the USA economic outlook, and as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective".

Such a move would be highly unusual. And it could serve nearly as an insurance policy on the impact of actions taken by the president, potentially facilitating his use of tariffs in unpredictable ways. Investors are now revising their expectations this year from steady interest rates to at least one rate cut. Powell said this week at a Fed conference in Chicago that the Fed is prepared to take "appropriate" action to keep the economy from a downturn, and stocks surged as a result.

Shares also were boosted by the Australian central bank's decision on Tuesday to trim its benchmark interest rate by a quarter of a percentage point in the first such cut in almost three years. Bond markets are pricing in the likelihood of rate cuts later this year.

The new trajectory is a sharp U-turn from where the Fed had been heading and poses risks whichever way the Fed's thinking goes.

Lower interest rates would support non-yielding bullion. That's despite an optimistic economic tone from Canada's central bank in its latest interest rate decision, when it left rates steady at 1.75 per cent and pointed to "accumulating evidence" of an economic recovery. "So obviously a rate cut would provide liquidity into the economy and the marketplace, and that's what investors are looking at right now". However, in many areas employment growth was being constrained by tight labor markets, forcing some companies to boost wages to attract workers. The Fed in May pledged to be "patient" as it judges future rate moves.

"It's early to make a judgment on that", Kaplan said.

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But efforts to stimulate further growth also carry a range of potential downsides.

The broad S&P 500 Index of large-cap stocks gained 2.1% to close at 2,803.27. If the Fed were to begin to cut them now, it would have little room to maneuver should the economy enter a significant downturn. Other Fed officials struck a similarly cautious tone.

Trump in early May announced he was raising tariffs on China from 10% to 25% to pressure on Beijing to agree to administration demands to reform its trade practices and reduce America's huge trade deficit with China. He addressed rising trade concerns and how it might affect the economic outlook.

The fast-moving events have also put Powell and the central bank - which have historically prioritized independence from politics - in an uncomfortable position.

"From a technical point of view the recovery above the psychological threshold of $1,300 represents a first positive element, while the strength shown in the last 48 hours, with the rally up to $1,330 is confirming the bullish scenario", wrote Carlo Alberto De Casa, chief analyst at broker ActivTrades. "Particularly now that we're done with earnings, it's the main game in town", he said. But manufacturers anxious that much more of the higher 25% tariffs would have to be passed on to consumers. Republican senators expressed opposition to the proposed tariffs.

Investors were also encouraged after U.S. President Donald Trump said he thinks Mexico wants to reach a deal to stop a new trade war. He said he's "comfortable" with current policy, but is concerned about weak inflation.

The Fed's Philadelphia regional bank said that "tariffs remained a key concern for many manufacturers".

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