US Federal Reserve cuts rate for the second time in a year after 10-year break

With the 2008, the US Federal Reserve System (FRS) has reduced the rate on 25 basis points for the second time. Before this, the Fed lowered the rate in July. Writes about this RBC.

Фото: Depositphotos

The US Federal Reserve, acting as the country's central bank, for the second time in a row reduced its base interest rate by 25 basis points (bp) from 2 – 2,25 to 1,75 – 2%.

In July 2019, the Fed already lowered its stake on 25 points for the first time since the global financial crisis, but then Fed Chairman Jerome Powell said that this was not the beginning of a cycle of easing monetary policy.

Such a decision by the Fed on the eve of the meeting was predicted by 94 analyst from 98 respondents. Only four believed that the regulator would leave the rate unchanged. Forecasts on the bet on the eve of the meeting did reflect 100% probability of its decrease. At the same time, the probability of a decrease by 25 bp accounted for 86%, while at 50 bp - 14%.

In its statement, the Fed noted that labor market indicators remained strong, unemployment remained low, but household spending was growing rapidly, investment in fixed assets and exports fell. The regulator gave mixed signals about its further actions.

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Will softening continue

If in early September, investors expected the Fed to cut its key rate five times in the next 12 months, now they believe it will cost three.

Markets almost completely recovered after the August collapse, triggered by the escalation of the trade war, and the United States and China agreed to hold talks in October and made mutual concessions (the American side postponed the increase in import duties, and the Chinese can increase purchases of agricultural products in the United States).

But it is unlikely that the easing of tension in trade relations will significantly improve the prospects for the global economy: companies will be cautious in investing, and global GDP growth will continue to slow down.

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Trump Recommendations

US President Donald Trump on the eve of the meeting suggested the Fed to reduce the rate to zero or even set it at a negative level. After that, he said, the country should begin to refinance its public debt. The cost of borrowing should be greatly reduced, and its terms should be significantly increased, Trump insisted. Only the naivety of the Fed and its head Jerome Powell does not allow the United States to "do what other countries are already doing," the head of state said. “A unique opportunity that we are missing out on boobs,” Trump concluded.

Having lowered the rate in September and again in October, the Fed will complete the process, which its chairman Jerome Powell called "mid-cycle adjustment." Similarly, the Federal Reserve acted in the 1990's, cutting rates by 75 b. n. when the situation on the labor market and in the manufacturing industry was similar to the current one.

After the rate cut in September, the Fed will lower it again before the end of the year, most likely in October, analysts say.

The probability of a further decline is questionable, given the inflationary risks associated with rising oil prices, argues Dmitry Dolgin, chief economist at ING for Russia and the CIS. In early September, the base scenario included only one reduction in the Fed rate before the end of the 2019 year and two more reductions in 2020.

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