The US Federal Reserve is determined to cut interest rates

Yesterday, Fed Chairman Jerome Powell, at a hearing before the House of Representatives Banking Committee, gave a relatively clear signal that the Fed intends to cut interest rates. Three rate cuts now appear possible and probable over the next twelve months; the first cut could take place as early as July.

The Federal Reserve’s monetary policy minutes published yesterday evening indicate that the June Council’s monetary authorities generally assumed that economic activity would continue to grow at a moderate pace. In this context, the Fed representatives expect a sustained strong development in the labour market and an inflation rate in the range of the target value. However, according to the assessment of numerous Council members, the probability of a less favourable development had increased. Among other things, risks would emanate from the still unresolved trade dispute.

From these different comments and assessments it can be deduced that the neutral key interest rate for the US Federal Reserve was shifted downwards. Thus, the current interest rate policy is already having a slightly restrictive effect at the level of the key interest rates of 2.5%. This means that the Fed can, of course, begin the cycle of interest rate cuts at the low level it has reached, but historically low, with increasing risks, even if the scope for interest rate cuts is naturally very limited. To what extent the political pressure and the media fire had an effect cannot of course be determined. It can be said, however, that the political importance of the central bank has also been recognised in the USA and US President Trump is trying to use it for his own ends.

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