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

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.”


Saudi central bank ready for any Aramco-related liquidity squeeze

Updated 27 min 49 sec ago

Saudi central bank ready for any Aramco-related liquidity squeeze

  • Aramco’s long-awaited listing on the Saudi Arabian stock exchange is due on Wednesday
  • The central bank has set up a team to closely monitor all indicators in the banking system during the IPO

RIYADH: Saudi Arabia’s central bank is ready for any liquidity squeeze from Saudi Aramco’s initial public offering (IPO) and is closely monitoring local banks, its governor said, after heavy demand for loans to buy the stock.
Aramco’s long-awaited listing on the Saudi Arabian stock exchange is due on Wednesday, completing the largest IPO on record and raising $25.6 billion from retail and institutional buyers who took on debt to back their orders.
“We don’t rule out that there might be squeeze of liquidity later on, that’s why I am ready and stand ready to intervene,” Ahmed Al-Kholifey told Reuters.
Saudis had clamoured to own part of the “crown jewel” of the world’s top oil exporter in the lead up to its IPO, with Aramco’s institutional tranche 6.2 times oversubscribed, while more than 5 million individuals subscribed to a retail tranche.
The Aramco IPO is the centerpiece of the Saudi crown prince’s plans to diversify the economy away from a reliance on oil, as the money will be reinvested by the Saudi Public Investment Fund (PIF) to promote growth in other sectors.
During the IPO process, the loan-to-deposit ratio (LDR) at some banks had exceeded a 90% “soft guideline” set by the regulator, but the ratio improved after the allocation process ended, Kholifey said in an interview.
“So far no bank has come to ask for liquidity from the central bank. We are ready to intervene in case there is a squeeze of liquidity but most of the indicators right now are not worrying,” Kholifey added.
MONITORING TEAM
The central bank has set up a team specifically to closely monitor all indicators in the banking system during the IPO process, and it held meetings on a daily basis.
“I don’t think in the near future they will settle, we have to keep monitoring the situation until we see things are normal, especially the LDR,” he said.
Saudi corporates snapped up the biggest percentage of allocations to the Aramco IPO at 37.5% and Saudi government institutions were allocated 13.2% of the institutional tranche, the latest figures issued by the deal’s lead bank showed.
Kholifey said that less than 2% of retail subscriptions were leveraged, and most of the bank financing went to high-net-worth individuals and institutional buyers.
He expects most of the IPO proceeds to be invested locally by the PIF, given that most of subscription were internal.
Riyadh scaled back its original IPO plans, scrapping an international roadshow to focus on marketing Aramco to Saudi investors and Gulf Arab allies. It has remained silent on when or where it might list Aramco stock abroad.