Summary for the 17th of July


In a speech at the Bank of France in Paris yesterday, the Fed’s Chair, Jerome Powell, gave clear signals of interest rate cut on the upcoming interest rate decision meeting. The financial markets had since June priced in a 100% probability of a rate cut on the July meeting. Yesterday’s speech in Paris was the last chance for Powell to correct those signals, but there were no signs of corrections. Powell said many of the FOMC members had argued for a more expansive monetary policy, thus confirming the signals for a rate cut.

Even though the Fed had planned to make the monetary policy more expansive, didn’t imply that it believed the US economy had slowed down. Powell expected the economy to remain solid and the labor markets to stay strong and the inflation rate to raise to 2%. The Fed’s outreach events were mentioned, and that the Fed had received feedback that the economic recovery had reached many low and moderate income communities to a greater extent than it had been for decades.

With interest rate cut in mind, the Fed is hoping to adjust the economy to the uncertainties from the trade conflict and global economic growth which will in turn lead to a strengthened future outlook  and reach those that still haven’t felt the effect of the economic recovery. The US labor participation rate is still lower than in the early 2000, though the participation rate has improved a little for those between 25 to 44 years old, indicating that there is more excess capacity in the US economy.

At the speech, Powell also mentioned the neutral rate of interest, which had been on a decline for 2 decades, the cause of the declined, as he mentioned, were due to the well anchored inflation expectations, demographics, globalization, slower productivity growth, greater demand for safe assets and weaker links between unemployment and inflation. He believed these factors would likely to persist, and lead to the neutral interest rate to remain low and thus the proximity to the lower bound of central banks target rates would be closer. This implied that the Fed might need to cut the interest rate below zero at the next recession.

Furthermore, Powell talked about how global factors were relevant to the US economy. He mentioned how the financial crisis highlighted the interconnectedness of the global economy, how the US economy affect the rest of the world, and vice versa. For example, when the stresses surrounding the Euro crisis and later, the China related volatility in 2015 and 2016 had put downward pressure on US interest rates and US confidence growth. According to Powell, these interconnections should be incorporate into policy decision making.

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