The Federal Reserve acts as mere insurance and disappoints the markets

Federal Reserve disappoints marketFederal Reserve disappoints market

Christian Scherrmann (DWS) | As was expected , the Federal Reserve cut interest rates 25 base points to a range of 2.0-2.25% at the July meeting of its Federal Open Market Committee (FOMC).

That is just about all the news worth commenting on, except, perhaps, the fact that the Fed will not reduce its balance sheet beyond August, two months earlier than it has announced previously, but in line with our expectations.
Curiously, two of the governors voted against a change and none voted in favour of a cut of more than 25 base points. This latter undoubtedly disappointed many. Nevertheless, it may say more about the markets than the Federal Reserve.

For a long time, there has been speculation about the justification for an interest rate change and the forward guidance. The original idea appears to have been to guarantee economic growth against the negative influences of trade wars and the weakening of global activity. However, in recent weeks, the argument has inclined more to the idea that lower interest rates were more appropriate due to the structural changes in the US economy.

A press conference with something for everyone. Jerome Powell described the cut in interest rates and mere insurance against external factors, an adjustment in monetary policy which would be unusual mid-cycle. In principle, all the economic data and the evolution of the global situation will continue to be followed closely. Clearly Powell is trying to get ahead of criticisms that the Fed has given into political pressure.

In the process, he also he also told the markets that a further relaxation could be moderate and is in no sense guaranteed. It is not surprising that the markets are disappointed.

About the Author

Shaun Riordan
Shaun Riordan is Director of the Department for Diplomacy and Cyberspace in the European Institute of International Studies and a senior visiting fellow of the Netherlands Institute of International Relations, “Clingendael”. He is also an independent geopolitical risk consultant. A former British diplomat, he served in New York, Taiwan, Beijing and Madrid, as well as the departments of counter-terrorism and the Eastern Adriatic in the Foreign Office. Shaun has taught at diplomatic academies in the Dominican Republic, Spain, Armenia and Bulgaria. He is the author of “Cyberdiplomacy: Managing Security and Governance Online” (Polity, 2019), “Adios a la Diplomacia” (Siglo XXI, 2005) and “The New Diplomacy” (Polity, 2003). He maintains a blog (www.shaunriordan.com) and can be followed at @shaun_riordan