Why the US Central Bank lowers the key interest rate

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The American Central Bank makes it cheaper to borrow money. Still, the US economy is strong, but the Fed sees risks. They are both in the global economy as well as in the United States.

US Central Bank chief Jerome Powell in front of the press

The Central Bank, the Fed cut the Federal funds rate by a quarter percentage point to a range of 1.75 to 2 percent. The Fed Chairman Jerome Powell announced the decision of the Central banker yesterday before the press in Washington. It is already the second rate cut this year and the second since the financial crisis of 2008.

Actually, interest rate cuts are intended to bring an economy in recession moving again. The low level of interest rates makes Saving unattractive, and companies and consumers are encouraged to cheap loans. Companies are investing more, consumers are more likely to buy. As the economy grows. The last rate cut by the FED in front of the two interest rate cuts this year came right after the financial crisis of 2008.

Precaution

Interest rates are currently being lowered, does not necessarily mean that a crisis is imminent. Rather, it is a kind of precautionary measure, similar to how the interest rate cut in July. The Central Bank wants to strengthen the US economy, even before slipping in a recession or crisis. “The economy is expected to remain strong,” said Powell at the press conference. She is currently in the longest upswing in the history and is already growing for 11 years. Above all, the mainspring of the US economy, the Consumer, is not tired of: The consumer confidence is solid, the income of households will grow, and unemployment has fallen since 2011, steadily, from nine percent to almost four percent. The Fed’s Motto could therefore read: “caution is the better part of valor”.

The Federal Reserve, the US Central Bank in Washington

Still, the Central Bank is confident that it even increased its forecast for us economic growth to 2.2 percent from 2.1 percent in June. “It is an unusual Situation,” said Powell. “The U.S. economy is strong. And yet, there are significant risks that there are to deal with.” The risks lie mainly in a weak or falling economic growth in China and Europe, but also of unresolved geo-political issues such as the Brexit play a role.

Homemade Threat

A threat, however, is made: the US President, Trump instigated trade conflicts. The weaknesses in not only foreign economies, but also the U.S. itself. The data already show. The exports of US companies have fallen compared to the previous year, tend to be: A survey of US manufacturers in August showed that the export orders have fallen to a 10-year Low. This means that “the exports go in the next few months, likely to be strong,” writes the British Economist Ian Shepherdson in a note to clients.

The impact on the GDP growth in the third quarter are expected to be “moderate”, but the prospects were grim, so Shepherdson. And also, the Central Bank sees reason for concern in this area: she has asked US company, how confident you look in the future. The result: she fought shy of investing because they expected a negative development of their business, said Powell.

How it could go

At least as important as the yesterday’s decision of the further path of monetary policy for investors. The Central Bank is open. Powell said in the press conference several times, it all depends on how the economy has developed. “If the economy should show weakness, it could be appropriate for further interest rate cuts,” he said.

Central Bank chief Powell and the US President, Trump

The situation is not complex, so it is not surprising that the members of the open market Committee of the Central Bank in the relevant so-called anything other than agree. This is apparent when looking into the Fed announcement. Only a relative majority, namely seven of the 17 members, the need for a further interest rate reduction this year; five members, it should be this year, no further reduction in more; the other five wanted to make to the reduction in the June final. The Central Bank has no interest in surprising the markets, or even shock, and therefore tries to act as transparent as possible. But at the moment it seems that even the Central bankers don’t know how with the current scenario, deal with it. This indecision, investors slowed in the first two hours of trading after the Fed press conference. The courses on wall street fell, first of all, the Dow Jones Index closed then, but just in the Plus.

Trump shoots against Powell

Still dissatisfied with the decision of the Central Bank, the US President, Donald Trump showed up. He calls for months of interest rate cuts and hoped for a growth spurt – just before the election year 2020, as some speculate. The interest rate move this week, he felt little surprise, as too hesitant, and wrote on Twitter: “Jay Powell, and the Federal Reserve fail again. No ‘courage’, no sense, no Vision! A terrible Communicator!” Powell, in turn, said before the press that he will not Express itself in General, to comments of “elected officials”. In the past, he had always stressed the independence of the Central Bank from the White house.