Move to stimulate growth
Trump’s hand suspected in Fed’s third rate cut in four months
Donald Trump wants cheaper money
US interest rates have been cut for the third time in four months with analysts suspecting pressure from president Donald Trump.
The Federal Reserve said the cut would stimulate sluggish business investment and exports.
But the labour market is strong and economic activity has been rising. The Fed said in its statement that job gains have been solid, on average, in recent months, and the unemployment rate has remained low.
It added, however, that although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent.
“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 1-1/2 to 1-3/4%,” it said.
Russ Mould, investment director at AJ Bell, comments: “A year ago, the Fed was shrinking its balance sheet to unwind QE and raising interest rates, with a clear plan to do keep doing more of the same. Now it is cutting borrowing costs and expanding its balance sheet.
“From one perspective, this still looks odd. The US economy is growing at 2%, as per the Q3 GDP growth figure, unemployment is near 50-year lows, wage growth of 2.9% is only just below its recent 10-year peak and the stock market trades at record highs.
“Yet inflation is refusing to stay on or above the Fed’s 2% target, chair Jay Powell and colleagues are clearly concerned about global trade flows and then we have the influence of President Trump, as he clamours for cheaper money in his quest to meet his 3% GDP growth target and stoke the economy ahead of the November 2020 election.
“To take a step back, perhaps the Fed’s decision today shows the underlying fragilities of the US and global economy, which were seemingly unable to withstand a headline US interest rate of 2.5% for very long. “