It was no surprise today when the Fed cut its base rate by 25 basis points. It also was no surprise that President Trump immediately after the Fed announcement called Chairman Powell and the rest of the FOMC a bunch of cowards for not cutting rates more aggressively. Another rate cut is expected before year-end.
But significant monetary easing will depend on the economy’s performance. So far, the economic numbers are still mild enough to call into question a recession within the next 12 months. Consequently, the Fed is likely to continue to maintain its easing stance. Chairman Powell noted that the economy remains quite solid and that we are in the 11th year of economic expansion. Moreover, inflation remains weak. The primary drivers behind economic growth are consumer spending and positive consumer expectations. On the negative side Powell mentioned slower investment and weaker corporate expansion.
The rate cut is neutral for the consumer and positive as far as the corporate sector is concerned. The persistent trade war with China and the potential trade conflict with Europe is a major worry for the Fed and if Trump escalates his trade conflicts the Fed may need to become much more aggressive.
The Fed is not the only central bank taking a more accommodative stand. The ECB just lowered its base rate and injected a substantial amount of liquidity into the system. The Bank of England appears ready to ease monetary policy and so are the Bank of Japan and the Bank of Canada. Indeed, much of the world seems to be worried about a potential recession and wants to forestall such an event happening. That is exactly where the financial world is headed.