In Focus – Fed Rate Cut
What’s happening?
What’s going on? On September 18th, the Federal Reserve voted to reduce short-term rates by 0.25% to cushion the U.S. economy against a global slowdown. The Fed’s decision to reduce rates follows their rate cut in July, in which Fed Chairman Powell stated that they would “act appropriately to sustain the expansion,” words that were repeated in the most recent statement from September’s meeting.
Why is it important? Interest rate cuts are typically viewed as defensive moves by the Federal Reserve to avoid an inevitable recession; however that is not their motivation in this instance. The Fed sees their decision as an opportunity to further safeguard U.S. economic growth from the global slowdown, which has been amplified by the unpredictable nature of the U.S.-China trade war.
What do we think about its impact? U.S. economic data such as manufacturing and industrial production, which softened earlier in the year, have since shown signs of recovery. Consumer inflation also had a tepid start to the year, which has made a small but meaningful turnaround in the summer months thanks to full employment and rising wages. We view the accommodative interest rate policy from the Fed combined with a strengthening U.S. economy as a positive indicator heading into the holiday shopping season.
The month ahead: Although the Fed decides to continue its path of cushioning the U.S. economy, the slowdown in global growth could continue if trade tensions remain unresolved. While the discussion between the two governments has been an up-and-down journey, the most recent developments have been favorable with the U.S. delaying its tariffs on Chinese goods.
The bottom line: The Fed’s guidance on interest rate policy is one of accommodation and not due to fears of a recession. Therefore, headwinds felt from the ongoing trade war are intended to be smoothed out by the interest rate reduction. Although growth is not explosive, economic data is beginning to recover from the softness encountered at the beginning of the year. We do not have data that supports a recession in the next six months, and we are actively monitoring critical sources of data for any changes that might arise.
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