US Fed leans toward a cut, but don’t expect one this week

Jerome Powell, chairman of the Federal Reserve. Financial markets are watching closely for a change of tone from the central bank. (AFP)
Updated 17 June 2019
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US Fed leans toward a cut, but don’t expect one this week

  • The New York Fed puts the odds of a recession in the coming year at about one in three — the highest since May 2008

WASHINGTON: As President Donald Trump’s trade wars drag on, and the global economy weakens, the US Federal Reserve is inching closer to its first interest rate cut in more than a decade.

But investors hoping to see the benchmark lending rate begin to drop this week are almost certain to be disappointed.

After preaching patience and leaving rates untouched since December, financial markets will be watching closely for a change of tone from the central bank and its chairman, Jerome Powell, and a sign the Fed is ready to step in to boost the economy.

Policymakers will hold two days of deliberations starting Tuesday, and for now are expected to keep the key interest rate in a range of 2.25-2.5 percent.

The Fed raised rates nine times in the last three years as the economy recovered and put millions of Americans back to work, and officials repeatedly said they expected the growth to continue.

But Trump’s aggressive tariff policies have shaken confidence, and some central bankers have begun to acknowledge a chill in the air.

The consensus is that the Fed is poised to switch directions and begin cutting rates. The only question is when.

James Bullard, president of the Fed’s St. Louis regional branch, was the first to make the move, saying early this month that a rate cut could be needed “soon.”

Just days later, Powell himself opened the door to a possible move, saying the Fed would do whatever necessary “to sustain the expansion” — a noticeable shift in posture.

Then Fed Vice Chair Richard Clarida added to the mix the possibility of “insurance cuts” — preemptively lowering rates just in case the economic outlook starts to deteriorate.

Wall Street welcomed this dovish talk, which drove a recovery in stocks after the rout in May. Futures markets as of Friday were forecasting as many as three cuts for this year, in July, September and December.

“In the old days, we’d have used the language the Fed has an easing bias,” John Ryding, chief economist at RDQ Economics, told AFP.

“They are predisposed to cut.”

Since the Fed’s last announcement at the end of May, the world’s largest economy has continued to send mixed signals.

But beyond the strictly economic factors are the political ones as Trump continues to flout tradition, repeatedly hammering Powell and the Fed on Twitter and in public comments for undermining his bid to supercharge the US economy.

In an interview with ABC, Trump acknowledged that his vocal criticism puts Powell in a box but said he would persist because he disagrees “entirely” with the Fed’s policy. “I’m gonna do it anyway because I’ve waited long enough,” Trump said in the interview due to be aired Sunday.

Powell steadfastly repeated that central bankers pay no attention to political pressure. But criticism of the independent Fed can backfire, pushing officials to resist Trump’s preferred course in order to prove they cannot be browbeaten — even if a rate cut is justified.

In the absence of inflation pressures, the Fed has room to cut interest rates. But the timing remains in question, especially as most policymakers have said they expect the economy to pick up later this year.

Surveys of consumer confidence and business activity are running hot, unemployment is still near 50-year lows, and consumer spending continues apace.

But elsewhere the news has not been so good. Economic growth in the second quarter could be half the pace of the first, the manufacturing sector has continued to weaken and business investment has declined.

And Trump warned he could jack up tariffs on another $300 billion in Chinese goods, something that would no doubt send shockwaves through the global economy.

At the same time, recession indicators are flashing. The New York Fed puts the odds of a recession in the coming year at about one in three — the highest since May 2008. Oxford Economics said there is a 53 percent chance in the next six months, but warns that markets may be “excessively pessimistic.”

However, many of these readings are noisy and could reverse course in the coming months.

This leaves the Fed walking a tricky line, showing a willingness to cut rates if needed without committing to it.

“I think that Fed officials have done the right thing,” Kathy Bostjancic, chief US financial economist at Oxford Economics, told AFP, noting there are no “hard data” yet that clearly call for a cut.

“They essentially said they were listening to the markets and opened the door to a rate cut without promising one.”


China central bank moves to support financial institutions

Chinese 100 yuan banknotes are seen on a counter of a branch of a commercial bank in Beijing, China, March 30, 2016. (REUTERS)
Updated 24 July 2019
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China central bank moves to support financial institutions

  • Many market watchers believe the PBOC will adjust its money market rates in early August if the US Federal Reserve cuts its key rate, as widely expected, on July 31

BEIJING: China’s central bank offered medium-term loans to financial institutions on Tuesday in an attempt to get more affordable funds to struggling smaller firms, as it steps up efforts to support a slowing economy.
With growth in China sliding to a near 30-year low, global financial markets are closely watching to see if the People’s Bank
of China (PBOC) will trim interest rates soon in line with expected easing by other central banks.
While the PBOC left rates on the medium-term loans unchanged on Tuesday, and the injection had been expected, it funneled more lower-cost funds into a credit program aimed specifically at reducing strains on small and medium-sized businesses.
The PBOC lent 497.7 billion yuan ($72.31 billion), including 200 billion yuan through one-year medium-term lending facility (MLF) loans and another 297.7 billion yuan through targeted medium-term lending facility (TMLF) loans, it said in a statement.
The size of the TMLF funding was 11 percent larger than the last such injection in April.
Interest rates for both liquidity facilities were unchanged from previous levels. The one-year MLF and TMLF remained at 3.30 percent and 3.15 percent, respectively.
The total amount roughly offset 502 billion yuan of MLF loans that were set to expire on Tuesday,
ensuring a steady supply of cash.
“Replacing some MLF with TMLF effectively cut funding costs. We should focus on the lower rate, instead of the net drainage on the day,” said Frances Cheung, head of Asia macro strategy at Westpac in Singapore.

BACKGROUND

China is keeping all its policy tools within reach as the trade war with the US gets longer and costlier, but sees more aggressive action like interest rate cuts as a last resort given concerns about rising debt.

The central bank said banking system liquidity will be “reasonably ample” after the lending operations.
About 160 billion yuan in reverse repos were also set to expire on Tuesday, according to Reuters calculations based on official data. The PBOC did not say in its statement whether it had drained funds from money markets on Tuesday.

BACKGROUND

China is keeping all its policy tools within reach as the trade war with the US gets longer and costlier, but sees more aggressive action like interest rate cuts as a last resort given concerns about rising debt.

Some traders said Tuesday’s moves were in line with the PBOC’s support measures since last year, which have been aimed at getting more affordable financing to small and private companies.
While Chinese regulators have urged banks to keep lending to distressed firms, such companies are often considered higher credit risks than big, state-owned enterprises.
Traders and analysts still expect the PBOC to cut rates on some of its liquidity tools in coming months.
The PBOC has already slashed banks’ reserve requirement ratios (RRR) six times since early 2018 to free up more money to lend, while guiding short-term market rates lower through liquidity injections in various forms.
Many market watchers believe the PBOC will adjust its money market rates in early August if the US Federal Reserve cuts its key rate, as widely expected, on July 31.
Cheung from Westpac said it was still possible the PBOC could lower the MLF rate after the Fed’s policy decision.
She also has pencilled in a 50 basis-point RRR cut this quarter, and another in the fourth quarter.