As predicted, Fed Chairman Jerome Powell acquiesced to the relentless pressure from the White House and yesterday announced a 25 basis point cut in rates. The constant stream of snipes from Trump’s twitter account finally wore Powell out. His news conference in announcing the cut sent mixed signals and received mixed reviews.
He cited a number of factors which influenced the decision to cut; international risks, low inflation, trade tensions, and weakening growth. He claimed the cut would support U.S. economic expansion and provide extra leverage to the country in trade negotiations. Powell was highlighting an economy at risk and slowing, but simultaneously preaching a favourable long term outlook. Market reaction to the cut was negative. Stocks went down, the dollar dropped, and precious metals rose.
Some pundits lashed out, claiming the move was unnecessary, politically weak, and that the extra stimulus would overheat stocks. Trump immediately doubled down, furthering his criticism of Powell and suggesting that the Fed should have cut deeper with a clear outline of an even lower rate trajectory longer term. Another mixed signal from Powell came in the form of his responses to questions about what the Fed would do next. Powell claimed that the cut does not mean interest rates won’t go up again in the near future while also providing vague answers on whether further cuts were on their way. Some pundits believe this cut, or ‘mid cycle adjustment of policy,’ signals an ‘inevitable’ move towards 0% rates, quantitative easing (money printing), and potentially negative rates (where the Fed pays banks to borrow).
The impact will be felt in Canada soon. Rob Carrick, The Globe and Mail’s Finance Columnist heralded the cut as a positive move which ‘cancelled the apocalypse for overextended borrowers.’ He effectively outlines the case that rates in Canada will now be coming down as well. History has shown that the BOC’s interest rate trajectory takes it cues from the Fed. Governor Poloz has already said the orthodox BOC line, that a Fed cut won’t impact the BOC’s decisions and that Canada doesn’t need lower rates. At the same time though, the BOC has made it clear that it will analyze and keep a close eye on the Fed’s decision and ‘dissect’ the reasons provided for the cut. In the medium term, Powell’s decision will continue to reverberate, and the pressure on easing at home will continue to build.