Fed does another rate cut, but not enough for Trump

As most bankers and economists predicted, the Federal Reserve in its open market meeting that concluded on Wednesday, approved a rate cut by a one-quarter point, as investors became nervous and the two major indices took a nosedive in response.

While the US economy has shown strength in both employment and a corresponding consumer confidence, there are shadows on the horizon, both domestic and foreign, that have begun to lengthen: wages have inched up, but have nor returned to pre-depression levels, and there are continued layoffs that threaten to reduce overall employment, coupled with wages that have not met the increased cost of living.

Also a threat to the strength of the nation is the ongoing trade war with China, promulgated by President Trump and the Brexit debacle orchestrated by Britain's new prime minister, both of which have global economic consequences that could roil the world economy.

Some have said that this is more of an insurance move than one that is specifically tied to the United States, yet others feel that with record low inflation, below the 2 percent target rate, favored by the Fed, that this allows for greater ease in corporate transactions, yet still others have noted that corporate America has responded by putting on hold plans for capital investment.

Regardless of how Wednesday's move by the Fed is seen it is a symptom that more may come as outlined in the Chair’s remarks, who feels that they have some maneuverability should the need arise.

Specifically, Fed Chair Jerome Powell, noted in his published remarks that, “Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent.”

In keeping with that implied mandate, Powell indicated that should the need arise, there could be more rate cuts, a fact that has not been overlooked by some bankers that feel there could be at least three more, if needed.

The news was not well received from the White House, where Trump said, in a tweet: “Jay Powell and the Federal Reserve Fail Again,” and No ‘guts,’ no sense, no vision! A terrible communicator!”

That statement is consistent with a view of the president’s critics who point that his understanding of the role of the central bank is limited, but also the steady intertwining of politics and interface that is also quickly becoming a “new normal” for the global economy.

Powell seems to be reacting less from presidential pressure, although that can be argued, and more from the data, much like his predecessor, Janet Yellen, as he assess “risks to this positive outlook,'' meaning the mostly rosy economic forecast, and notably, that the Fed would use “more extensions,” if needed.

This new goal could be expanded to, some bankers say, to the end of the year, but most say not to the end of 2022.

There was not total consensus, in fact, who had dissented at the June meeting and who saw no need to cut.

“There was discord over the decision, with three officials dissenting. Two — Boston Fed President Eric Rosengren and Kansas City Fed President Esther George — have both voiced concerns that the US economy isn't in need of an extra boost from rate cuts. But St. Louis Fed President James Bullard favored a deeper, half-point cut,” said CNN Business, but he is seen, by some, as an outlier, when it comes to the FOMC meetings.

While the segue to another cut was predicted, there are some notable investors who see that there is more heat than light to the role of the Fed, and “In an interview with TheStreet, when asked about how he considers the Fed’s decisions, Buffett said, “I never give a thought to it.” When asked what he thinks of investors’ heavy emphasis on the Fed rate cut announcement, Buffett replied, “It’s a mistake to try and make investment decisions based on what you think the Fed is going to do.” He added, “just be content owning a good income-producing asset.”

“Mr. Powell also pushed back on Mr. Trump’s recent call for the Fed to slash rates below zero, saying such an idea was rejected during the height of the 2008 financial crisis and would not be high on the list of options if the economy worsened. If the Fed is forced to cut interest rates back to rock bottom, he said, it will again turn to bond-buying programs to provide added stimulus,” reported The New York Times.

Despite this assertion there are some, said the Times, that say otherwise, and feel that despite the traditional separation, “Some onlookers could view rate cuts, like Wednesday’s, as a sign that the central bank is caving to political pressure, particularly as dissent abounds.”

Less than six months ago, Trump noted brightly that he expected the economy to soar to 3.0 percent, but “Policymakers now anticipate the US economy will grow slightly stronger than previously expected, at a 2.2% rate, and unemployment will hold steady at 3.7%, according to their updated economic projections. In June, the Fed forecast that economic growth for the year would stand at 2.1% with unemployment at 3.6%,” reported CNN.

Perhaps, the best summary, was the BBC report, that quoted, “Brian Coulton, chief economist at Fitch Ratings, said the upgrade to that growth prediction underscores the fact that the Fed is worried about global factors, such as the trade war, rather than the underlying health of the US economy.

"This move is all about the deterioration in the global economic outlook over the late summer and very little about incoming US data," he said.

"While the Fed has maintained its 'will act as appropriate' language, we still see this as an insurance policy move and don't expect a series of further rate cuts," he added.