Why did Powell signal a rate cut before the U.S. economy entered recession?

category:Finance
 Why did Powell signal a rate cut before the U.S. economy entered recession?


Powell said that the first half of 2019 was a very good year for the economy and the 11th year for expansion. However, the inflation level is lower than the symmetrical 2% target of the Open Market Committee (FOMC), and all kinds of turbulence, such as trade issues, global growth slowdown, have a significant impact on economic activity and its prospects.

The labour market remains healthy. From January to June this year, the average monthly employment reached 172,000, which was lower than last years average of 223,000, but also exceeded the number of new workers entering the labor market. As a result, the unemployment rate in June fell to 3.7% from 3.9% in December last year, close to its lowest level in 50 years. Employment opportunities remain abundant, and employers are increasingly willing to hire and train less skilled employees. The benefits of a strong labour market have become more pronounced in recent years. The wage growth of low-skilled workers is also more obvious. Inflation (personal consumption index, PCE) was close to the target of 2% last year, but it began to decline after 2019 and fell to 1.5% in May. Core PCE inflation also fell to 1.6% in May.

Uncertainty and low inflation did not improve after May

Against this background, the Open Market Committee (FOMC) kept the federal funds rate at 2.25% - 2.50% in the first half of this year. At interest rate meetings in January, March and May this year, the FOMC indicated that patience should be maintained, as future adjustments to federal funds should be appropriate to the Feds goal of supporting maximum employment and price stability.

Powell recalled that at its May meeting, the Federal Reserve noticed turbulence in global growth and trade, but evidence at the time suggested that these turbulences had eased. Data from China and Europe are encouraging. The patient stance adopted at that time seemed appropriate, and the Committee did not see a strong factor in the need to adjust monetary policy. But after the May meeting, these turbulences re-emerged and created greater uncertainty. Fed research into business and agriculture has found worries about trade prospects. And global growth is sluggish, and will likely continue to affect U.S. economic growth.

In its June statement, the FOMC believed that due to uncertainties in the economic outlook and the pressure of low inflation, it would continue to monitor the data and take appropriate action to maintain economic expansion. Powell said many FOMC members see it as a more relaxed monetary policy. Since then, the situation has not improved significantly. Uncertainty in trade issues and concerns about global economic growth have weighed on the outlook for the U.S. economy and continued to depress inflation.

Following Powells testimony, the market increased its bet on a 50 basis point interest rate cut in July. The market believes Powells speech confirms that interest rates will be cut at the 30-31 July meeting. Traders have increased their bets on a 50-basis-point cut, but the general expectation is still a 25-basis-point cut. When asked about the possibility of cutting interest rates by 50 basis points, Powell did not respond directly. As of the time of publication, FedWatch, the Federal Reserve observation tool of Chicago Merchants Institute, showed that the probability of interest rate reduction on July 31 was still 100%, the probability of 25 basis points of interest rate reduction dropped to 71.4%, and the probability of 50 basis points of interest rate reduction increased to 28.7%. CNBC analysis points out that, according to historical data, a cut in interest rates in the absence of a recession can increase U.S. stocks by 100%, a situation that occurred in 1971. Source: Peng Mei News Responsible Editor: Han Yukun_NBJ11142

Following Powells testimony, the market increased its bet on a 50 basis point interest rate cut in July.

The market believes Powells speech confirms that interest rates will be cut at the 30-31 July meeting. Traders have increased their bets on a 50-basis-point cut, but the general expectation is still a 25-basis-point cut. When asked about the possibility of cutting interest rates by 50 basis points, Powell did not respond directly.

As of the time of publication, FedWatch, the Federal Reserve observation tool of Chicago Merchants Institute, showed that the probability of interest rate reduction on July 31 was still 100%, the probability of 25 basis points of interest rate reduction dropped to 71.4%, and the probability of 50 basis points of interest rate reduction increased to 28.7%. CNBC analysis points out that, according to historical data, a cut in interest rates in the absence of a recession can increase U.S. stocks by 100%, a situation that occurred in 1971.