Is the US about to cut interest rates?

Federal Reserve chairman Jerome Powell has strongly hinted that an interest rate cut is iminent, in a testimony before the US House Financial Services Committee yesterday.

Powell cited threats to the US economy’s steady, decade-long expansion - including Trump’s trade wars, slowing global economic performance, chronically muted inflation, and geopolitical instability - in what the markets read as an effort to lay the groundwork for dovish monetary policy manoeuvres, potentially later this month.

Investors ignored the warnings about the global economy, focusing instead on the chance for cheaper borrowing, sending stock prices up, bond yields down, and causing the S&P 500 index to briefly cross 3,000 for the first time. The index has almost quadrupled since its climb began in March 2009.

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If the anticipated rate cut goes ahead, it would be the first time the central bank has lowered interest rates for ten years.

Delivering the Fed’s semi-annual report to Congress in the first of two day’s testimony on Capitol Hill, Powell told lawmakers that “it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook”.

“Uncertainties about the outlook have increased in recent months,” Powell said, adding that “a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit”.

The New York Times explains: “Falling interest rates lift stocks in two ways. They lower the returns on new investments in bonds, the main alternative to stocks for many investors. That makes stocks look more attractive to investors. A rate cut also makes it cheaper for consumers and companies to borrow, and that can buck up economic activity and help corporate profits.”

The Guardian says the move is likely to please the president, noting that “Powell has been under immense pressure from Donald Trump to cut rates”.

In what the newspaper calls a “series of unprecedented attacks on the independence of the Fed by a sitting president”, Trump wrote on Twitter earlier this month: “Our most difficult problem is not our competitors, it is the Federal Reserve!”

When asked if the chairman had any intention of stepping down if Trump attempted to push him out, Powell was clear: “Of course I would not do that. My answer would be no. The law clearly gives me a four-year term, and I fully intend to serve it.”

Sung Won Sohn, economics professor at Loyola Marymount University in Los Angeles, told the Associated Press: “I think it will be the start of a series of rate cuts. Powell wants to provide fuel for the economy down the road.”

As the Financial Times reports, despite the positive market reaction, the move isn’t without potential pitfalls: “One of the risks for the Fed in cutting rates now is that it could leave it less room to stimulate the economy once a new recession does come sometime in the future. But Mr Powell said he did not expect a ‘severe downturn’ in the US economy and insisted that the Fed’s tools would be ‘adequate’ to tackle any future crisis.”