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A brief summary of yesterday’s FED rate cut and Bank of England (BoE) announce rate decision later

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Yesterday, the Fed rate was cut by 0.25%, which was the second straight cut.

The Federal Reserve’s Chairman, Jerome Powell, confirmed that further cuts and policy direction would be ‘Data dependent’ as the Fed is not on a pre-set course.  Fed Chair, Powell, does not think the Fed will use negative interest rates as a policy tool.  The cut was confirmed as a ‘stability’ measure – some calling it an ‘Insurance Policy’ against domestic and global slowdown.

It’s clear that there are mixed views in relation to the cut but, following the Global financial crisis, it is clear that economic policy makers will do ‘what it takes’ in order to preserve ‘controlled growth’ and economic stability.

President Trump was less pleased as he would like a rampant growth economy leading up to an election year…  Tweeting ‘Jay Powell and the Federal Reserve fail again.  No ‘guts’, no sense, no vision!  A terrible communicator!”

I have appended below an article written in Professional Adviser and also provided the link for you to read the article in Professional Adviser – https://www.professionaladviser.com/professional-adviser/news/3081718/no-guts-fed-disappoints-trump-with-25bps-rate-cut

‘No guts!’: Fed disappoints Trump with 25bps rate cut
Seven of ten FOMC members vote for small cut
By Mike Sheen  19 September 2019

The Federal Reserve opted for a 0.25% cut of its key interest rate last night (18 September), disappointing US President Donald Trump who said chairman Jerome Powell lacked “guts” for not implementing a deeper cut.

In the face of slowing US growth and market uncertainty, seven out of ten members of the Federal Reserve’s Open Markets Committee voted to shift the target range for the rate to between 1.75% and 2%. One member voted for a shaper cut, while two voted to maintain rates where they were.

The Fed warned of “uncertainty” about US growth, which fell to 2% in the second quarter of this year but revised upwards its prediction for growth this year to 2.2%.

Pressure on the bank has also ramped up in the face of a recent spike in borrowing costs in the repurchase market, which firms use for short-term cash lending.

While the cut was in keeping with investor expectations, Trump was less pleased tweeting: “Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!”

Head of fixed interest research at Quilter Cheviot Richard Carter said the cut was “largely as expected”, and while Trump “would have liked them to have done more judging by his regular rants on Twitter… the US economy remains in fairly good shape and there is no sign of an imminent recession so a cautious approach makes sense”.

He added: “We are likely to see more gradual interest rate cuts over the course of the year though as the US China trade war continues to hinder the global economy.”

Close Brothers Asset Management CIO Nancy Curtin said the 25bps cut was a “pragmatic step towards the Fed’s goal of sustaining the expansion” in the face of below target inflation, an inverted yield curve, a spike in the oil price and a “global slowdown”.

However, Curtin agreed that “economic data is not all bad”, with strong consumer spending, “steady” figures for jobs and productivity, and wage growth.

She added: “The big question is what comes next. Stock and bond yields have been rising, and there’s an argument to be made that the current conditions do not justify further easing this side of Christmas.

“The market has priced in another 25bp cut in December; Powell will be keen to see if the recent resumption of trade talks accomplishes anything definitive before the end of the year.”
Tim Foster, fixed income portfolio manager at Fidelity International, agreed that, “disappointingly for investors”, the Fed’s most recent comments show there is not “any consensus for further cuts this year”.

However, he added that the Fed’s “simple rate cuts now [look] rather old-fashioned compared to the [European Central Bank’s] comprehensive and complicated package of easing measures last week”, arguing that “this simplicity could change soon”.

Foster said: “The Fed’s toolkit for monetary policy proves increasingly ineffective against upward pressure on money market rates.
“[Quantitative tightening] has finished, but the rapid pace of US government borrowing (in the short term), and growth in cash in circulation means that reserve balances will continue to fall.

“This makes US money market rates harder to control repo rates rose sharply earlier this week and the effective Fed Funds rate rose above the target band yesterday, while the New York Fed started special open market operations to try to bring rates down.”

The statement following the rate cut decision leaves the ‘door open’ to further rate cuts.

Pimco’s, Andrew Bosomworth, Head of Portfolio Management, Germany, earlier stated on Bloomberg “the more central banks intervene the more complex the position becomes”.

Bank of England rate announcement is due later.  The BoE are expected to keep rates on hold at 0.75%.  Commentators are suggesting the BoE are keeping their powder dry until further clarity in relation to Brexit unfolds.

It is the final day of the Hearing in relation to the suspension of Parliament today so the outcome is likely to dominate the news when the views are concluded.

Other News

Norges Bank raises key rate to 1.50% earlier, which is seen to be a move towards price stability, rather than a focus on growth and inflationary target compliance.

European Central Bank – ECB restarts Targeted Longer Term Refinancing Operations (TLTRO) today.

Brexit has (to date) cost 1,000 City based jobs ….

Action Points for investors

There was very little that has changed in respect of the Fed rate cut, although it signals that central banks are ‘holding back’ on maximum stimulus, reducing rates as needed so, of course, we can expect bouts of increased volatility so buying (dips/falls/plummets) makes sense for the long term when these positions develop, little has changed.  Central Banking policy seems to be controlling economic output, although inflation is not where policy makers would like it to be which is, in turn, controlled by political issues such as Trade and Brexit, which also impacts currency movements.

A quality mix of asset classes across geographies and sectors therefore remains the intelligent way to invest for the long term.

As always, get in touch if you have any questions.

Warm Regards.

Richard and the Best Price FS Team

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