US Federal Reserve remains reasonable
As expected by most market participants, the US Federal Reserve has lowered its key interest rate by 25 basis points. At the same time, it ended the balance sheet reduction prematurely. Overall, the Fed has thus loosened the monetary policy environment slightly, but avoided classifying this as a trend reversal. It has thus resisted the high political pressure and continued its relatively sensible monetary policy.
The statement published after the interest rate decision sounds optimistic and hardly changed. For example, the Fed has attested that economic growth has continued to be moderate and that consumer spending has increased. Market-based inflation expectations remain low. The effects of the cooling global economy and subdued inflationary pressure explain the 25 basis point cut in key interest rates. Now the developments will be „further observed“, which is a linguistic disarmament compared to the phrase „closely observed“, which usually signals an imminent monetary policy measure. At the press conference, Fed Chairman Powell reiterated that the outlook for the US economy was favourable and that monetary easing should support this development. In particular, the easing of the monetary reins is based on three pillars. Thus, the latest decision should contribute to bringing the price level development in the direction of the inflation target. It is also due to the trade conflict and the global economic downturn. The interest rate step is a „mid-cycle-adjustment“.
Overall, the markets reacted disappointed. In an initial reaction, the stock markets tended to decline. Yields on US Treasuries have risen. In this context, two-year yields reacted much more strongly than the long end of the curve. The yield curve has therefore flattened again. This means that the financial market is once again discussing the significance of the yield curve. Many market participants see the clear flattening as a recessive signal. The reaction of the US President was not long in coming either. In his opinion, all financial market participants had waited for an aggressive Fed rate cut cycle. But the Fed is abandoning him and the country as a whole. After all, the quantitative easing had been ended, which should not have begun in the first place. He would not get any help from the Fed, but he would still win.
The Fed Chairman has made it clear that a slightly accommodative course is appropriate. His explanations do not exactly sound like the beginning of a classic cycle of interest rate cuts. This assessment is also explicitly confirmed by Powell. For example, he put on record that the Monetary Policy Council did not currently see a new interest rate cycle. However, the Fed Chairman did not rule out the possibility that further rate cuts or hikes might follow. The further orientation of monetary policy depends on the fundamental data, although the risk of a recession in the United States is currently low. This is appropriate in view of the economic and political environment, but for some market participants it is an unusual and new communication policy.