The US Federal Reserve has cut interest rates for the third time in four months. Russ Mould, investment director at AJ Bell said, “A third interest rate cut this year from the Federal Reserve, added to the central bank’s return to buying US Government Treasuries in its efforts to calm interbank lending markets, could hardly be a bigger contrast to where we were this time in 2018.
“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.
“Global indebtedness has surged by two-thirds since the start of the Financial Crisis in 2007 to over $250 trillion, according to data from the Bank of International Settlements, at least partly encouraged by central banks, who have cut interest rates to encourage borrowing and keep the economic plates spinning. But you cannot cure a debt crisis by taking on more debt and the Fed – along with the Bank of Japan, European Central Bank and possibly the Bank of England – is now finding it very hard to ‘normalise’ policy and withdraw from the extraordinary measures of 10 years ago that have become commonplace today.
“Financial markets do not seem unduly concerned, at least if the S&P 500 is any guide, as they feast off more cheap cash, but central bankers, economists and investors alike are having to address the issue of whether monetary policy is on the right course and – if not – what can be done instead. The option of ‘more of the same’ appears to be the preferred choice in America but the ECB’s Christine Lagarde is already championing more expansive fiscal policy and the burden may now fall on politicians – and tax payers – to try and conjure up growth from somewhere.”
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