'No guts!' Fed disappoints Trump with modest 25bps rate 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%.

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.'"

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.

"This is why today's 25bp cut in the target band was accompanied by an extra 5bp cut in the interest on excess reserves (IOER): the IOER started life at the top of the Fed's target band, but it's now only 5bps above the bottom.

"Prepare as well, therefore, for subsequent meetings to announce new tools to help the Fed push market rates down, perhaps ‘POMOs' (‘Permanent Open Market Operations') to buy Treasuries in perpetuity (don't call that QE though), or a Standing Repo Facility to lend at the upper end of the target band." 

This article was first published by Investment Week, a sister title to International Investment.