US Federal Reserve Keeps Fixed Interest Rates Despite Pressure from President Trump.
On the 1st of May the US Federal Reserve kept interest rates unchanged and displayed no intentions to change them despite pressure from the US President Donald Trump to cut interest rates in order to give the economy a boost:
“Well, I personally think the Fed should drop rates. I think they really slowed us down, there’s no inflation; I would say in terms of quantitative tightening it should actually be quantitative easing. Very little if any inflation, and I think they should drop rates and they should get rid of quantitative tightening; you would see a rocket-ship but despite that, we’re doing very well.”
Taken from Reuters.com
During a news conference on May 1st, 2019, after the FOMC (Federal Open Market Committee) meeting had finished, the Federal Reserve Chairman Jerome Powell said:
“At the FOMC meeting that concluded today, we reviewed economic and financial developments in the United States and around the world and decided to leave our policy interest rate unchanged. My colleagues and I have one overarching goal to use our monetary policy tools to sustain the economic expansion with a strong job market and stable prices for the benefit of the American people. Incoming data from our last meeting in March have been broadly in line with our expectations. Economic growth and job creation have both been a bit stronger than we anticipated while inflation has been somewhat weaker. Overall the economy continues on a healthy path and the committee believes that the current stance of policy is appropriate.”
Click here to watch the full news conference.
Federal Reserve policymakers predicted that the most plausible result for the United States economy is that it may continue to expand, the labor market may remain stable and a slight increase in the rate of inflation.
The Fed’s announcement that it had no intentions of slashing interest rates regardless of President Trump’s prompts to do so, triggered a moderate level of movement within the financial markets that saw stocks and bond yields rise. On the other hand, the S&P 500 index dropped by a rate last recorded in the middle of March, by nearly 0.8 percent.
The main area of focus within the Fed’s policy report was the performance of inflation levels which continues to hover below its 2 percent target. The monetary policy report implied that the current drop in the rate of inflation could continue for a longer period of time than was forecasted and had no links to a decrease in energy costs.
The current statistics and reports indicate that inflation levels are standing at around 1.5 percent, which consequently could damage consumer sentiment because of concerns that could arise regarding the overall health of the US economy.
The Fed Chairman Jerome Powell commented on the Fed’s inflation targets saying:
“The committee is strongly committed to our symmetric 2 percent inflation objective. For much of this long expansion, inflation ran a bit below our 2 percent objective alongside considerable slack in resource utilization but last year with the unemployment rate at or below 4 percent inflation moved up for March through December core inflation which excludes volatile food and energy components was at or very close to 2 percent. Overall inflation fluctuated from a few tenths above 2 percent to a few tenths below over this period with the moves mostly due to changes in energy prices. As expected overall inflation fell at the start of this year as earlier oil price declines worked through the system. Overall inflation for the 12 months ended in March was 1.5 percent.”
Click here to watch the full announcement.
So, for the time being, the Fed’s Chair indicates that low levels of inflation give the central bank breathing space when it comes to shifting its lending rate between 2.25 and 2.50 percent.
The Federal Reserve Bank increased rates four times last year and had predicted further increases in lending costs in 2019. During the beginning of this year the Fed slowed its quantitative tightening strategy due to growing anxiety regarding the current affairs such as the trade war with China.
What is the federal funds rate?
The federal funds rate is the total sum charged for overnight loans and is the Federal Reserve’s primary vehicle for regulating loan expenses within the economy.
The Fed’s conclusion to maintain interest rates in a fixed position suggests that changes may not be seen until further data arises in the overall direction and health of the economy.
How did the financial markets respond to the Fed’s decision?
“STOCKS: After holding steady in the wake of the Fed announcement, the S&P 500 dropped following Fed chair Jerome Powell’s news conference. The benchmark index was down -0.65% late Wednesday. BONDS: The 10-year U.S. Treasury note yield fell to 2.46% in the wake of the FOMC decision but now trading around 2.51% and the 2-year yield, which fell to 2.24% following the FOMC decision, is now trading at 2.30%. FOREX: The dollar index pared their losses briefly and was down 0.238%.”
Taken from Reuters.com, click here to read the full article.
An additional response to the Fed’s decision was given by the NovaPoint Capital’s chief investment officer and lead portfolio manager for investments, Joseph Sroka.
“The Fed elected not to change interest rates, consistent with solid but slowing economic growth and overall tame inflation. I believe inflation running below the Fed’s 2% target is the key measure keeping them on hold. I think they plan to remain patient and evaluate data as the year unfolds. I didn’t see anything new, but a lot of comments were consistent with advance GDP data last week, where we saw some slowing in household spending, which may be caused by a labor market that while solid, doesn’t have lots of room for incremental improvement. Some of the (economic) data we’re seeing shows moderating growth, which the Fed mentioned in their statement. The engineering of the soft landing is on track. In evaluating the data if econ growth slowed at a more rapid pace, perhaps lowering the rate could be a potential later in the year.”
Taken from Reuters.com.
The Federal Reserve’s Chairman, Jerome Powell, displayed a sense of composure. With global affairs showing positive signs of improving; for example, the trade dispute between China and the US had progressed further and the risk of a no-deal Brexit has been postponed until the end of October 2019.
With business and consumer confidence being restored and the risk of economic damage diminishing, the Federal Open Market Committee does not deem it necessary to change interest rates at this moment in time. However, the Fed has raised awareness of the rate of inflation which is standing below its target of 2 percent.
An inflation rate that runs below the target level could justify the decision but also suggests that there could be interest rate cuts should the economy project signs of shrinking.
In a Twitter post on April 30th US President Donald Trump tweeted the following:
“China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!”
On Friday, May 3rd Non-farm payrolls rose by over 260,000 jobs compared to the previous month, as hiring increased across many sectors. The successful performance of the US economy could reinforce President Trump’s ambitions for a win in the next election. In 2 months, the US economy could witness a decade of continuous growth.
The labor force has expanded mainly due to an increase in wages. The NFP report revealed an increase of 0.2 percent in the average hourly wage which maintained yearly earnings at approximately 3 percent, and the average hours worked dropped by 0.1 from 34.5 to 34.4 hours.
The number of US jobs increased with the creation of over 260,000 new jobs in the month of April while the rate of unemployment fell to 3.6 percent, with such a level last recorded in 1969, signaling continuous expansion and growth in the economy regardless of the fact that the previous year’s boost from Republican tax reductions have diminished.
The NFP report reinforces the conclusion made by the Federal Reserve in which it deemed it appropriate to maintain a fixed rate of interest and postpone any alterations to its monetary policy. Jerome Powell, the Chairman of the Federal Reserve, said that the economy’s performance and the increase in new jobs were better than expected whereas the level of inflation was underperforming somewhat with its rate below the Fed’s 2 percent target.
UniCredit Research’s chief US economist, Harm Bandholz commented on the results of the NFP report and said:
“Employment gains are strong enough to dispel any immediate concerns over the health of the economy, while wage gains are not strong enough to force the Federal Reserve’s hand to tighten the policy stance.”
Taken from The Irish Times website.
The positive results from the non-farm payrolls report extinguished unease surrounding a possible economic downturn which also supports the Trump administration’s handling of the economy.
Some analysts anticipate a leveling of economic growth as the availability of workers becomes limited, which could lead to an increase in salaries and push the level of inflation towards the 2 percent mark set by the Federal Reserve.
The NFP report showed that within the month of April, the construction sector gained an increase of over 30,000 jobs. On the other hand, the automobile sector saw a loss of jobs with tensions rising regarding emissions and global warming concerns, the decline of car sales, and global-political disputes, for example, the US-China trade war.
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