Despite pressure from US President Donald Trump, the Federal Reserve (Fed) held the line on interest rates and indicated no rate cuts for the time being, keeping the rate unchanged between 2.25% to 2.5%. The Fed decided to not cut rates as economic outlook is still generally positive. Yesterday, the S&P 500 Index approached record high, closing 0.3% higher at 2,926.5 points.

Rate unchanged as economic outlook still positive

The Fed’s rate-setting committee decided that they will not cut rates for the time being as the economic outlook is still generally positive with low unemployment and solid consumer spending. Information received since the Federal Open Market Committee meeting in May indicate that the labor market remains strong and that economic activity is rising at a moderate pace (Financial Post, 19 June). In a decision closely watched by financial market participants, central bank officials voted 9-1 to keep the benchmark rate in a target range of 2.25% to 2.5%.

Trump accused Powell of undermining his administration

The Fed’s chairman, Jerome Powell dropped its pledge to be “patient” before rate moves in a sign it was poised to act, and Powel stopped referring to weak inflation as “transient”. Although economic growth is expected to continue, Powell said policymaker’s concerns solidified in the few weeks since the Fed last met in early May, with the unpredictable outcome of Trump’s trade dispute with China and other countries at the top of their mind. Earlier, Trump has repeatedly accused Powell’s Fed of undermining his administration’s efforts to boost economic growth and has repeatedly demanded that rates to be cut (The Star, 20 June).

In a press conference following a policy statement release, Powell said that the Fed is quite mindful of the risks to the outlook, and is prepared to move and use its tools as needed to “ act as appropriate” to sustain a nearly 10-year economic expansion.

Headline inflation missed targets

Nearly half of the policymakers now show a willingness to lower borrowing costs over the next six months, and seven see rates likely to warrant being lowered by 0.5%. The Fed also projected for headline inflation to be 1.5% for the year, which is lower from the previous projection of 1.8%. They also expected to miss their 2% inflation target next year, a blow for the central bank (The Star, 20 June).

Source: Macquarie Research - 20 Jun 2019