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(MENAFN – AFP) For the first time since the Great Recession, ten years ago, the US Federal Reserve is on the cusp of reducing interest rates, thereby strengthening America's defenses against the weakening of the world economy.
It will be a stunning reversal for the central bank, canceling a rate increase announced just seven months ago.
And the political turnaround comes as the central bank has faced a number of communications challenges, trying to communicate its confidence in the economy while being willing to support its continued expansion.
Fed officials have had to go back and clarify recent statements. In the middle of President Donald Trump's fiery public campaign against Fed President Jerome Powell, a central banker seemed to offer it as an alternative to the leadership position.
Meanwhile, although the rate cut this week is almost universally expected, economists disagree on whether the Fed is making the right decisions. Indeed, the rate cut could now seem very unusual: the Fed has never done so with such a low unemployment rate.
Fed Chairman in New York, John Williams, influential vice chairman of the Fed's monetary policy committee, said this month that acting quickly to reduce lending rates could "vaccinate" an economy against the "disease" later.
But his office later sought to clarify that the commentary referred to the history of monetary policy and not to a prediction of how the Fed would act on July 31.
Trump jumped almost immediately: "I like the first statement of the New York Fed President, John Williams, much better than his second."
Diane Swonk, chief economist at Grant Thornton, said the Fed 's gaffes of communication did not help her withstand Trump' s onslaught and her demand for lower borrowing rates. .
"The president may have been right for the wrong reasons because he was destroying the economy himself," she told AFP, pointing out that the damage caused by the commercial battles with China and others had been underestimated.
So, "even when they do what is right, we feel that they capitulate," she said, undermining their credibility.
Trump's repeated vocal attacks on the Fed are unprecedented. And Swonk warned that he could turn around.
"What the president is doing is undermining the most powerful tool the Fed has when it needs it the most."
– mixed economic signals –
James Bullard, the dovish president of the Federal Reserve Bank of St. Louis, who, just like Trump, advocated for a rate cut, recently announced that he would badume the post of Fed chairman. it was proposed.
In the context of reports that Trump has contemplated withdrawing or demoting Powell, Bullard's comments do nothing to strengthen confidence in the Fed chief.
Powell has repeatedly stated that political considerations had no impact on the Fed's policy committee. But even the economic case is opaque.
There are signs that the economy does not need stimulus from the central bank: consumer spending is strong and employment growth is steady, not to mention record stock prices on Wall Street.
"For what it's worth, we think any rate reduction is a mistake," said economist Ian Shepherdson in a recent note to his clients.
But others think that the Fed will make up for the mistake of December.
The Fed raised rates in December, despite signs of a weakening global economy and Trump's many global trade disputes.
But central banks now cite these same reasons for a rate cut.
"I think the Fed has made a mistake and that it knows it," AFP Quincy Krosby, chief market strategist at Prudential Financial, told AFP.
And there are a number of reasons to be worried.
GDP growth has slowed this year. Manufacturing is in recession. The housing market has stumbled. Business investments are flat amid uncertainties caused by trade wars.
Powell told lawmakers this month that Trump's trade wars with China and Europe had "shocked" American business confidence.
Meanwhile, Europe and China are wavering, absorbing the demand for US exports and heralding contagion, while the possibility of a Brexit without agreement, with its uncertain consequences, is getting closer each day.
Revised government data released on Friday shows that at the end of 2018, growth was half as strong as previously reported, which had the effect of disorienting the economy earlier this year.
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