The US Federal Reserve cut its benchmark short-term interest rate for the first time in 11 years in what Chairman Jerome Powell called a “mid-cycle adjustment” to sustain the US economic expansion. Powell appeared to struggle to reconcile his admission the US economy is strong with this decision, says Franklin Templeton Fixed Income CIO Sonal Desai. She shares her thoughts on the July policy meeting and the potential market implications.
In the press conference following the Federal Reserve’s (Fed’s) July 31 monetary policy meeting, Fed Chairman Jerome Powell looked quite uncomfortable—perhaps not surprising given the corner the Fed has boxed itself in.
He found it hard to justify the just-announced 25 basis point interest-rate cut, and even harder to explain what will drive future policy moves.
In his opening statement, Powell argued that the rate cut was aimed at (i) providing insurance against the risks from trade tensions and the global growth outlook; (ii) boosting inflation; and (iii) making the labor market even hotter, because lower-income workers are now benefiting from rising wages and more job opportunities (“they haven’t seen a better labor market in living memory” he said later).
But he also admitted that the US economy is strong (“the closest we have ever been to our targets”) and the outlook is positive.
Powell struggled to reconcile this benign economic assessment with the rate cut.
He argued that the economy is strong partly because the Fed has shifted to a more dovish stance since last December, easing financial conditions and boosting confidence. That’s a clever argument, but it only goes so far.
I found his assessment of the risk of trade tensions quite inconsistent. Powell knows that trade tensions have been with us for over two years, and yet, as he noted, the US economy was as strong in the first half of this year as it was in 2018—and 2018 was the best we’ve seen in a while.