Tap dance on a high wire.
That’s how life for central bank Governors has become.
The political interference is so much that more than economics, it is this pressure which dictates policy decisions.
Like our very own RBI Governor, US Fed Chairman, Jerome Powell is also facing pressure from the stock markets/Wall Street as well as leadership to cut rates.
No one expected Powell to bend down to the pressure tonight and as widely expected, he held the rates steady while signaling that the rate cut might come in sooner than later. In the March FOMC meet, the Fed had made it very clear that there would be no change in the rates this year but maybe a 25 bps hike in 2020. The Fed as expected, cut the “patient” rate approach as a prelude to a rate cut ahead.
And just like it happened in India, the markets there too want a rate cut and Trump has been pretty vocal, like always, asking for a rate cut. The Wall Street analysts say that a 25 bps rate cut in July and another 25 bps cut before end of 2019 is already penciled in. Notwithstanding the pressure, economic data suggested a holding on to the rate while global risks surge. And today, Powell said that Fed would cut rates in the months ahead if the economic outlook weakens.
USA currently has record employment, a record stock market just 1.00% off its al- time high. Economy is on solid footing. And in this situation if the FOMC had cut rates, it would have been complete waste of precious ammunition that should be used when things turn south. And it is good that the FOMC did not pander to the political pressure from a bully in the White House!
Highlights of the FOMC statement:
- To maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.
- Uncertainties on inflation, employment and economic activity has gone up
- Will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion
- Timing and size of future adjustments to the target range for the federal funds rate to depend on incoming economic data.
- 9 members of the FOMC voted for no change while one member voted for a 25 bps rate cut.
Currently, the global situation is pretty volatile. And all the central banks around the world are trying to find a sane road through unconventional monetary policies.
The Indian markets? They will move on as this meet was already discounted as a “no change” one. The days are expected to remain volatile and a semblance of predictability will come only after the Budget; currently, there is really no other stimulus to work with. The G20 meeting at the end of June will be crucial as it will indicate how the trade war moves ahead.