Asia stocks firm as Fed props up rate cut expectations

Image of Fed Fund futures

Image of Fed Fund futures

"Although central banks around the world have embarked on policy-easing in a bid to support their respective economies, investors are left to ponder whether the stimulus will be enough to offset the effects from heightened US-China trade tensions", said Han Tan, market analyst at FXTM. Investors are now pricing in a 24.5% chance of a 50-point cut in US rates later this month, according to CME Group's FedWatch tool, easing off the 60.2% probability hit on Thursday.

US President Trump intervened, as could be expected, given that he has issued strident demands that the Fed cut rates and boost Wall Street by a further 10,000 points on the Dow.

The market markets have traded very anxiously, Treasury Mnuchin comments notwithstanding, but given the Euro only bounced to 1.1285 as the rates markets went full out Fed policy bazooka pricing mode there wasn't that much United States dollars selling versus the Euro in particular.

Following Williams' remarks, the New York Fed told media outlets the speech concerned decades of research and was not about what the central bank may decide at its next policy meeting.

His remarks line up with testimony last week by Fed chairman Jerome Powell, and comments a bit earlier in the day from Williams, that have cemented expectations for a rate cut.

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But cutting rates does not mean the Fed is necessarily in an "easing cycle", he said or on a pre-set course to lower rates further. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. "It's not for when you're facing a slowdown or a disappointment in hitting your inflation target". Surveys showed business sentiment soured, leading to worries about a stronger pullback in investment.

Not all Fed officials are on board with even a quarter-point decrease. Fed officials, he said, will need to decide what to communicate about what economic data will matter to them when they take their next steps. When adjusted for inflation, the neutral rate is near the Fed's current policy rate, which is in a range of 2.25-2.50%.

While the U.S. economy is "in a good place", Clarida said recent global economic data have been softer than expected. "If what you're doing is signaling, there's an advantage to having a stronger consensus, which sends a cleaner message", he said. These comments, combined with similarly dovish rhetoric from fellow Fed member Clarida earlier in the day, sent the greenback around half a percent lower against the Euro on Thursday evening. He said it made more sense to cut rates by a smaller increment now and hold out the possibility of additional moves later.

Cutting rates could reset people's expectations for inflation and reset relative US government bond prices, or the "yield curve", to a level more conducive to growth.

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