FED CUTS RATES – ONCE AGAIN, INSURANCE AGAINST GLOBAL RISKS

about 5 years ago

The US Federal Reserve did what was expected – cut rates by 25 bps. More importantly, the Fed left the door open to more rates cuts in the coming months but uncertainty mounted as the voice of dissent grew among the Fed members. More importantly, not a single official sees it falling lower than 1.5 to 1.75% through the end of 2022.

And rightly so, Powell opened his Press conference by saying, “We took this step to keep the economy strong.” So why the rate cut when the economy is doing well as indicated by the increased household spending and strong labor markets? Powell said it was more on account of global developments- so this rate cut is less about incoming US data and more like an insurance against the global uncertainty on account of US-China trade war and UK’s ugly exit from Europe.

What was very funny and expected from Trump was a Twitter reaction to the rate cut. He lashed out at Chairman Jerome Powell on Twitter, saying, "Jay Powell and the Federal Fail Again" adding, “No 'guts,' no sense, no vision! A terrible communicator!" Trump is angry because he has been pushing the Fed to cut rates to zero or even negative territory!

Even before the US markets could react to this, talk already began of maybe another rate cut before 2019 ends. Such is the pace today – the current news is already discounted for while the prep has begun for the next rate cut. But there are some who feel another rate cut might not come in as quickly as this time itself, while 7 out of the 10 officials voted in favor lowering the short-term benchmark to a range between 1.75% and 2%, three of them voted for no change. In the previous Fed meet, July, there were two voices of dissent and that has now grown to three. Clearly, there is a discordant view for monetary policy and this is a sign the Fed does not face easy choices as it heads toward the close of the year.

Analysts in the US say that the fears of slowdown overseas, unresolved policy issues, deteriorating trade relations, persistent low inflation – these are bigger issues which a rate cut alone will not help resolve. The US markets edged lower after the rate cut - the reaction is also less about the policy and more about expectation of the policy pathway ahead. This does sound like an echo coming from India, doesn’t it?

For the Indian markets, this 25 bps rate cut by the Fed might not mean much. The entire focus of the market will be on the all-important GST council meet, scheduled for 20th Sept, Friday. Though the word on the street is that auto companies might not get the steep GST cut that they are expecting, other sectors might get some relief. Thus all attention will be on the decision of this meet.

A rate cut by the Fed does mean more money coming into Indian equity and debt and maybe stem some of the outflow from FPIs. But the truth today is that rate cut by Fed or not, it is domestic issues which have taken centerstage. As we brace ourselves for the bottom which we are going to hit in the Q2FY20 earnings season, FIIs too would prefer to wait it out rather than rush right now.

As we hit the trough, let’s tell ourselves that this was expected and could be the bottom before it starts rising again. Just as the market discounts rate cuts within a few seconds, hope Q2 is also already discounted.