US Federal Reserve ditches ‘preset course’, rates to be guided by market forces

On Wednesday, US Federal Reserve said that it might cut the interest rates further if the ongoing uncertainty continues to loom over weak global economy.  US trade war on China has significantly contributed to this global slump, scaring away investments from the market. What added to the adverse times: Hong Kong Protest and Brexit uncertainty and world over drop in the manufacturing sector.

Last month, Fed announced rate cuts by a quarter a percentage point against the backdrop of the escalating tensions between Beijing and Washington. The drop in the rates was introduced for the first time in a decade. The central bank introduced the new rates to save the nation from falling into another economic crisis. The Fed last got the rates down a decade ago, to support the crashing economy during 2008 financial crisis.

According to the minutes of the Fed’s July 30-31 policy meeting, the market risks and the trade war tensions would continue to slow down US economic activity and weaken global economy. So Fed decided to remain ‘flexible and focus on the implications of incoming data for the outlook’.

Fed officials said the bank’s decision would be “guided by incoming information and its implications for the economic outlook and that avoided any appearance of following a preset course.”

US President Donald Trump has been pressuring Fed to slash the interest rates more liberally than it did, to circulate more money in the economy, increasing the purchasing power of Americans. Trump has been openly expressed disappointment in the central bank’s conservative rate cutting, especially after four rate increases in 2018.

Hours after of the Fed chair’s announcement, Trump wrote: “What the market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, the European Union and other countries around the world.

“As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place – no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!”

At a news conference on July 31, Fed chairman Jerome Powell admitted that the Fed rate cut was a protection valve “against downside risks from weak global growth and trade policy uncertainty, to help offset the effects these factors are having on the economy.”Fed officials forecasted that the US economy would grow at a sluggish in the second half of the year, but remained positive about “a sustained expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric two percent objective as the most likely outcomes.”

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