Published: Fri, July 12, 2019
Finance | By Loren Pratt

Fed chairman hints at first interest rate cut in over a decade

Fed chairman hints at first interest rate cut in over a decade

In late 2017, Trump nominated the Powell, an investment banker, to succeed Janet Yellen as chair of the Fed, the world's most powerful central bank.

Some surveys have suggested the manufacturing sector is creaking under stress from the trade war with China, with USA firms contending not only with the cost of President Trump's import tariffs but also a deterioration of the global economy that is threatening domestic and worldwide demand. Gold rallied and USA equity markets hit record highs. The core consumer price index (CPI), excluding food and energy prices, rose 0.3% in June over the month prior, exceeding expectations.

The headline June producer price index (PPI) is expected to register as flat month-over-month for June, according to consensus economists polled by Bloomberg, retreating from a 0.1% month-over-month increase in May.

In a speech at an OMFIF Foundation meeting at Washington University, Bullard said the Fed should be concerned that inflation remains stubbornly below its 2 percent target.

Jerome Powell, the Federal Reserve chairman, said Wednesday he could not be fired by Donald Trump. Traders should appreciate the idiosyncratic way interest rate markets are now discounting Fed rate cuts: the rate cuts are extremely frontloaded. Trump has also explored the legality of demoting Powell from the Fed chair and claimed he has that authority.

At their June policy meeting, Fed officials had signaled those concerns might warrant lower rates, and "since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the USA outlook", Powell said. "What we'd like to do is take out some insurance against the possibility of a sharper-than-expected slowdown".

However, U.S. GDP growth actually picked up in the first quarter for the first time in five years, and official data covering the three months to the end of June will not be released until August.

This means a July rate cut is nearly certain, by at least 25 basis points, maybe even more, but even James Bullard, the noted dove and St. Louis Federal Reserve President in a speech at the same time as Powell's stated that 50 basis points would be "overdone" and that a 2nd cut later in the year should be enough. Furthermore, Powell is set to testify for a second day.

Capital flows tend to move in the direction of the most advantageous or improving returns, with lower rates normally seeing investors driven out of and deterred away from a currency while rising rates have the opposite effect.

Today's early price action suggests that gold traders are pretty confident of a 25-basis point rate cut, but not so sure of the 50-basis point cut.

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