Fed opens door to rate cut amid growing 'uncertainties'

Japan Financial Markets

Japan Financial Markets

As the adepts who read the runes of central bank statements quickly reported, the word "patient" had disappeared from the latest version, implying the Fed was changing from a wait-and-see approach to something more active.

In light of those growing uncertainties and a lack of price pressure, the Fed said it will continue to monitor data and "act as appropriate to sustain" almost 10 years of United States economic expansion.

Officials indicated that they expected to cut rates next year, reducing the median Fed funds rate forecast to 2.1% for 2020. It also plummeted to a six-month low against the Japanese yen at 107.47. But Fed Chairman Jay Powell expressed openness to the idea of cutting rates if economic indicators warrant. It allows wages and prices to rise steadily, encouraging businesses and households to spend and invest.

The statement said the Fed still sees a continued economic expansion and inflation at long last rising to the two percent target as the most likely outcome but now clearly recognises concerns on the horizon, pointing to growth that is only "moderate" and "soft" business investment.

The policymakers are considering cutting rates in part because President Donald Trump's trade conflicts, especially with China, have become a threat to the economy. It appears many, and perhaps most, policymakers trimmed a full half percentage point from their outlook for rates.

And despite so much gloom from Trump and many others, Powell remained surprisingly optimistic about the USA economy; consumer spending, which makes up three-quarters of the economy, had rebounded and remained strong, while job and wage growth was also firm.

By using the Fed to pump easy money into the economy, the risk of a slowdown ahead of voting day is diminished. The yield on the 10-year Treasury note briefly touched its lowest level since September 2017.

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Draghi's comments sent the value of the euro tumbling against the dollar, prompting an angry tweet from Trump accusing the European Central Bank leader of acting to weaken the euro to gain a competitive trade advantage against the United States.

Trump said the decision by the ECB created an unfair advantage for the Eurozone economy, when contrasted to the US economy which now has a central bank offering some of the highest interest rates in the developed world.

Therefore, the threat to the independence and stability of the Federal Reserve is something that will come alive in a major way were the US economy to start slowing over coming months. The drop in inflation, however, was a blow for a central bank hoping to reach its target sometime next year.

Stocks opened the week higher and rallied on Tuesday after President Donald Trump said he plans to meet with China's president at the end of the month to discuss their ongoing trade war.

Powell, asked after this week's policy meeting about the danger of delaying any policy move, said "I don't think the risk of waiting too long is prominent right now". "I have a four-year term, and I fully intend to serve it".

"The economy's baseline outlook is good - sustained growth, a strong labor market and inflation near our objective", Fed vice chairman Richard Clarida said on Friday in an interview with Bloomberg Television. While he highlighted the Fed wants more information before delivering, he hinted that data needed to improve and (trade) uncertainty needed to fade to really change the rate path outlook.

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