The US Federal Reserve has cut interest rates by 25 basis points to between 2% and 2.25%, marking the first time that interest rates have been cut since the financial crisis, to help stave off the possibility of an economic downturn.
The central bank is hoping a rate cut will be the necessary injection to keep the US economy healthy, especially because it has limited ammunition to respond to a downturn with historically low interest rates.The Fed also announced plans to end the reduction of its $3.8trn asset portfolio, effective August 1, two months earlier than previously expected. The runoff was set to end after September.
The central bank's Federal Open Market Committee said it was ready to "act as appropriate to sustain the expansion", hinting at more rate cuts in the future, and paired the move with a decision to halt the reduction in the Fed's balance sheet two months earlier than planned.
Fed chairman Jerome Powell said "weak global growth, trade policy uncertainty and muted inflation" had prompted the major shift in policy.
But comments by Powell at a press conference, spooked investors by suggesting that the FOMC would take a more cautious approach to easing than they had expected. He described the move as "a mid-cycle adjustment to policy," suggesting that sharp further cuts were unlikely.
Analysts cited the lack of a clear intention by the Fed to initiate further cuts - something US president Donald Trump has demanded of policymakers this year.
A few hours after the Fed chair's news conference, Trump tweeted: "As usual, Powell let us down," while giving a nod to the central bank's decision to end quantitative tightening. "We are winning anyway, but I am certainly not getting much help from the Federal Reserve!"
The Fed's rate cut and plans to end quantitative tightening follows months of pressure from president Trump, who has repeatedly rebuked his pick to lead the central bank for not doing enough to boost the US economy.
But Powell said pressure from Trump did not factor in the Fed's decision. We don't conduct monetary policy in order to prove our independence," he said.
Before the Fed meeting, markets were betting on three more interest rate cuts by the end of 2019.
Nationwide senior economist Ben Ayers said future policy moves by the Fed would depend upon how the economy and trade talks progress in the coming months.
"Should trade negotiations turn positive and economic data, especially inflation, firm in coming months, July's move could be a one-and-done easing," said Ayers in a note. "Still, given the slowing trajectory for the economy and precedence from previous mid-expansion easing cycles, a further rate cut (or two) by year-end may occur.
Industry unimpressed by not so dovish move
Phil Smeaton, chief investment officer at Sanlam UK, said:"Recent months have seen Powell come under increasing pressure to provide monetary stimulus, with commentators claiming that the US economy is underperforming. But while President Trump might welcome the decision by the Fed to cuts rates for the first time in a decade, what comes next remains uncertain."
"This decision is not data-led, which is a marked shift for the Fed. US GDP fell below the White House's target of 3%, coming in at 2.5%, but with unemployment at a 50 year low the US continues to set the pace for its global competitors. With the President on an election footing, an economic boost would certainly help his campaign. But significant inflationary risks remain, not least the failure to resolve the trade wars. While the rate cut may satiate the White House for now, it will surely not be long till Powell is once again in the crosshairs. Yet the Fed will resist pressure for an extended period of monetary expansion."For deVere Group's international investment strategist, Tom Elliott, there are winners and losers from the Fed's rate cut and US and global investors now need to revise their portfolios."Today's decision by the Fed to cut rates suggests that while the policymakers believe the economy is looking in good shape, there are also some growth headwinds on the horizon and inflation is low, so a rate cut will act as a buffer.
He continues: "Where does this leave for U.S. and international investors?"Investors can incorporate both opinions into a portfolio by owning growth-sensitive stocks and misery-loving government bonds. This multi-asset approach is standard amongst long-term investors."Specifically, the rate cut will put further downward pressure on the US dollar, with the Yen, Swiss franc and Euro likely to rise against the greenback.
"Emerging stock markets should gain the most from lower Fed rates and a weaker dollar, since the massive U.S. dollar debt many emerging market companies took on in the early years of this decade becomes cheaper to service and repay in local currency terms."US exporters should also benefit, plus the battered British Pound may get some near-term relief from a Fed rate cut, particularly as the Bank of England seems unlikely to be cutting its own benchmark rates any time soon."Elliott concludes: "US and global investors now need to revise their portfolios to ensure that they are best-positioned to take advantage of opportunities and mitigate the risks as we enter what is likely to be a new era of rate cutting for the Federal Reserve."
Kevin Doran, chief investment officer at AJ Bell, sees the Fed move as having yielded to political pressure, via tweets: "Having been brow beaten into submission by Trump via Twitter, the implications of today's [Wednesday] rate cut go much further than the 0.25% drop in the target rate, marking a change in policy that future generations may come to rue.
"It's increasingly hard to square monetary policy on an emergency setting against a world of record employment, trend economic growth and stock markets at all-time highs. Having yielded to political pressure, the independence of central banks, upon which inflation expectations are anchored, is now arguably at risk. A successful Trump 2020 campaign increases that risk in our view and the Fed have likely just aided that outcome."
Nancy Curtin, chief investment officer of Close Brothers Asset Management, said: "As we see the first interest rate cut since the depths of the financial crisis, investors should take some relief from the comfort blanket of looser monetary policy protecting them from the global slowdown and trade tensions. It is a significant departure from Powell's focus on tightening last year, and indicates the Fed's pragmatism and flexibility when it comes to reacting to the data. No doubt President Trump will likely claim credit for the change following months of tireless pressure to cut rates in order to boost growth, but this was a prudent move.
"Expectation-beating US GDP figures last week would have given the Fed pause for thought. However the figures showed that a half-point cut would have been far too aggressive, rather than removing the need to cut rates at all. Despite low unemployment and economic growth coming in above-trend, risks abound. The Fed is still concerned about the effect of a weaker global economy and trade tensions on expansion."
LGIM's Tim Drayson believes the Fed could NIRP a downturn in the bud. "More broadly, there is little concern today about US banks' profitability. Even if there were some hit to shareholders from a move to negative interest rates, it seems likely that banks would be able to pass on negative rates as the majority of their funding comes from wholesale funding markets and large institutional depositors rather than small depositors.
So, with Donald Trump using Twitter to call for more accommodative monetary policy in ever-greater numbers of capital letters, it is very much conceivable that in the next downturn the Fed might opt for modestly negative interest rates even before resuming QE."Andrew Mulliner, global bonds portfolio manager at Janus Henderson Investors expects this cut to drive bonds yields further down. "If the statement read dovish, the substance of the press conference conveyed a more wary stance towards further easing from chairman Powell, if not a neutral stance. The press conference started with optimism and positivity on the US economy, with justification for the cut attributed to concern around international factors and the knock-on risks it posed to US business sentiment. However, investors hoping for another dose of dovish rhetoric to further prop up stocks and support lower bond yields and spreads were left somewhat disappointed.
He added: "Ultimately we believe that whilst the Fed may not be willing to capitulate to the rate expectations embedded in the market, be it due to concerns of causing excessive risk taking or being accused of pandering to the President, the Fed will be forced to lower rates further in coming months as the steady deterioration in the business surveys feed into weaker US economic data. Subsequently we believe bond yields are destined to decline further from here, whilst equities and credit spreads are vulnerable."
Lee Ferridge, head of multi-asset strategy, the Americas at State Street Global Markets, said the less dovish message is likely to cause the yield curve to flatten. "As widely expected, the FOMC cut rates for the first time in 10 years. However, the accompanying statement and subsequent press conference appeared designed to rein back market expectations of another three cuts to come over the next 12 months. The Fed is clearly concerned by the recent data slowdown in parts of the economy (although notably not in the labor market) and continued soft inflation prints. While this move was characterised as more of an insurance cut, the FOMC may now be in wait and see mode to see if its fears over the trade war and global slowdown come to fruition. This less dovish message is likely to see short rates rise and the yield curve to flatten. It is also likely to see the USD gain further, while equity markets are unlikely to welcome the reduced prospects of more rate hikes to come."
Hinesh Patel, portfolio manager at Quilter Investors said: "Despite being priced into the market this rate cut by the Federal Reserve, the first in a decade, is an historic moment for the global economy. We have not seen a cut of 0.25% from the US since the 90s so it is clearly a rarity. Federal Reserve Chairman Jerome Powell has signalled that he and his team are looking to manage the US economy through what could be a turbulent few months and is implementing an insurance policy against a possible economic downturn.
"The comparisons to the 90s are apt, as much of the macro data we see now is similar to that period, and it is clear Powell is looking to provide the economy with a comparable soft landing as trouble remains on the horizon."
"As there were two dissenters in the committee, as well as Donald Trump's predictable outburst on Twitter, the use of uncertain language by Powell is important going forward as he looks to balance the needs of the US versus that of the global economy. This is mid-cycle adjustment can be interpreted as one to respond to global issues while US data remains stable. This move has added two-way risk back into the market and is an attempt to encourage executives to spend and invest, rather than helping consumers. The paradox here is that corporate leverage is already very high and the "hawkish cut" could actually end up tightening financial conditions ahead"
UAE, Saudi, Bahrain cut interest rates following Fed
Central banks in Saudi Arabia, the United Arab Emirates and Bahrain cut their benchmark interest rates on Wednesday by 25 basis points following a similar decision by the Fed. Kuwait kept its discount rate unchanged at 3%.
"Monetary easing, although small, is timely and will give the region's economies a helpful boost as growth has yet to recover from the 2014 oil price decline," Ziad Daoud, chief Middle East economist at Bloomberg Economics, said in a report before the announcement. Gulf central banks largely move in lockstep with the US to protect their currencies' peg to the dollar.
Saudi Arabian Monetary Authority lowered its repo rate from 300 bps to 275 bps, and its reverse repo rate from 250 bps to 225 bps with an "objective of preserving monetary stability", it said in a statement on its web site.
The Central Bank of Bahrain also slashed the interest rate on its one-week deposit facility to 2.5% from 2.75%. It also reduced the overnight deposit rate to 2.25% from 2.5%; the one-month deposit rate to 2.85% from 3.1% and its lending rate to 4.25% from 4.5%.