FED CUTS RATE – NOW FOR A LONG PAUSE

about 1 month ago
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It was a foregone conclusion that the US Fed will cut the rates tonight and it did. For the third time since July, the Fed cut the rate by 25 bps once again.

This third rate cut marks the end of any more rate cuts for 2019. There will be one more Fed meet in December but as was indicated earlier on itself, the Fed kept its target of 3 rate cuts this year and its pretty much done for now!

The one thing which everyone wanted to see was whether or not the Fed uses, the statement, “act as appropriate,” it figured in all the previous three statements. Well, the Fed dropped this line from the statement this time and that means that we are looking at a pause in the rate cut now. There is no timeline given as to how the rate trajectory will run for the next year.

This time around the Fed said, “The committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path” of its target rate.  This means the rate cut will not come as easy as it did till now. The rate cut was always justified as an “insurance” against the ongoing tariff war with China and the economic uncertainties that it raised in its wake. Now that this tariff war seems to be ebbing, the Fed will likely go for a long pause and look at how the economy performs within.

During the day, there was some good news on the US economic front too as the GDP report showed that the economy grew at an annualized rate of 1.9% in the third quarter v/s 2% in Q2. This was much better than what most economists had expected and this should help the Fed breathe easy as it takes a pause and dispels fears of a recession. The rate cuts have been very good as residential investments rose 5% even though business investment declined 3% but this was mainly due to the Chinese tariff war and the uncertainties it unleashed.

Over the last six weeks, the Fed has pressed forward with these large temporary injections and even restarted growth of its balance sheet via Treasury-bill buying. On Monday, the Fed added $76.583 billion in liquidity to financial markets through an overnight repurchase-agreement operation.

For the Indian markets, this decision of tonight does not really matter as it is looking at its own Govt to make some decisions on taxes; the same expectations of the cut in DDT, STT and capital gain taxes remains and that is expected to keep the momentum going.

And even as we pen this story, history was made - at the strike of midnight, Jammu & Kashmir ceased to be a state – there are now two new Union Territories – J&K and Ladakh; this will pretty much dominate the national news today.

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