Why did the president of the US Federal Reserve raise worries about world markets?

Why did the president of the US Federal Reserve raise worries about world markets?

The cut interest launched with one stone two blows … and did not hurt them

US Federal Reserve Chairman Jerome Powell announced at a press conference on Wednesday night the first rate cut since 2008,

London: Absolute Mounir

There seems to be a near consensus that the Federal Reserve will cut interest rates by a quarter of a percentage point under pressure from President Donald Trump, this reduction being the first of its kind since 2008. However, this decision, although expected, has been a shock to the markets because the US economy is growing. A Wall Street badyst said: "They are convinced of this. decision, it means that they are afraid of a decline in growth and that they have data to prove it. But all the data they have been talking about for a few months show that growth is consistent; If they take this decision under political pressure, it is a major disaster and a bad sign that the independence of the Fed is threatened. "
To illustrate this confusion, observers point out that the chief of the reserve, Jerome Powell, seemed incoherent when the decision was announced: the newspapers fell out of his hands, they looked at his watch three times and hesitated to answer questions. Questions!
The question is really difficult because the reduction reflects a "coup d'état" in the opinion of US bankers. A shot described by some as "a stub" in the face of the speech of Powell pronounced yesterday during the last rate hike in December. What aggravated the situation for the observers is Powell's announcement that the US Federal Reserve would end its budget cuts, due to interventions and purchases, after years of buying financial badets. , especially bank debt, to stimulate the economy.
Thus, in six months, "monetary normalization" has disappeared and is expected to raise interest rates as it can be reduced in the event of a recession. The intention is to end the intervention on the banking markets as they have returned to normal.
The United States, which had to show the ideals, or hope, and make the decision to cut, indirectly recognize that they can not return to the conditions before the crisis. The European Central Bank is preparing to further reduce its interest rates and continue to intervene in debt markets to stimulate a near-stagnant economy, in contrast to the US economy, which has 39, one of the best growth rates … but what has suddenly changed?
A Wall Street banker said Jerome Powell was very optimistic last fall. He referred to the return to normalcy of the US economy, inflation has returned to almost 2% and more, and wages are rising thanks to the sharp fall in the unemployment rate … So, in December, the rate went from 2.25 to 2.5% I hope to take the extra lift, up to 3% and more. Thus, the task was accomplished with great success to announce the final victory over all the repercussions of the financial crisis.
Suddenly, everything changed after the sharp fall in stock markets at the end of last year. For some, his interest in stock markets in general, and Wall Street in particular, is starting to ease. Their ready-made instincts are the possible repercussions of a trade war. The tone of criticism of the Federal Reserve 's policy has intensified and critics have helped President Donald Trump to discredit the high interest rate as well as any investor. Under this pressure, the Federal Reserve decided in January to put an end to the rate hike policy. This, in the opinion of some members of the Fed demanding the continuation of monetary normalization, indicates that the financial and stock markets have won the bet, not financial but political, as confirmed by a former member of the Fed.
Some economic sources say: "The change of course is not solely due to pressure, but there are internal reasons for the composition of the Fed.The monetary institution was not entirely in the hands of hawks who wanted high interest rates to prevent the return of a financial bubble such as that which had erupted in 2008. On the contrary, everything is in place in the composition of the Council to support the economy At least in the short term, for example, Richard Clarida, Trump's deputy chief of reserve, and John Williams, chief of the New York reserve, believe the benefits should not hurt the economy. "
Last spring, Powell began preparing the climate for rate cuts, noting for the first time that the economic downturn was preparing and that the creation of new jobs would also slow down. However, there is some evidence to suggest the opposite: 3.1% growth in the first quarter was better than forecasters' expectations, and the job market continued to grow until 224,000 new jobs were created in June. it was not sufficiently justified.
In this case, the Fed had to look for new arguments outside conventional data: it began to talk about the slowdown of the Chinese and European economies, as well as the "ghosts of the trade war" that create uncertainties that weaken the confidence of industrialists and push investors into a frenzy.
The Fed found arguments in support of its new leadership during President Trump's recent attack on Mexico, threatening to impose tariffs on imported goods if it failed to reach an agreement on the limitation of immigration, as well as on the tightening of tensions between the United States and China. All this led the Fed to believe that the economic slowdown was quickly preparing.
This was relatively true, observers said, while pointing out that the US interest rate cuts would not support the Chinese and European economies and would not dispel the fear of the industrialists of the trade war. At the same time, however, they have not ignored the fact that the cost of borrowing in the United States has dropped so much that the 10-year interest rate has fallen in a year of 3.25 to 2%.
By lowering interest rates, the Fed is moving towards two goals or wants to kill two birds with one stone: weaken the dollar and slow down inflation. With regard to the weakening of the currency, which is also the Treasury's goal, the dollar and two years ago was supposed to fall theoretically because of the commercial and financial deficits, but nothing of that kind Is produced. President Trump did not like this situation. The dollar remains strong, as economic growth is better than that of other developed economies, especially Europe, but the US dollar will remain strong and will strengthen further when Europeans will soon propose to reduce the interest rate of the economy. 'euro.
On the other hand, inflation excluding energy and food fell to 1.6%, below the target of 2%. The external environment is deflationary and domestic inflationary pressures are low and unemployment is low, with no expected or expected rise in wages. Powell wants at all costs to reach 2% to prevent operators from setting prices, which the United States could sign in the Japanese scenario.
The hawks, hostile to the formation of any new financial bubble, similar to those that exploded in 2008, are still unhappy with the recent downsizing because it appeared too early. The reduction did not satisfy the market players as it fell below their expectations by half a percentage point, which had the effect of further stimulating inflation and growth. boost badet prices.
Powell also disappointed Amal Trump, who chided: "We failed because the market wanted to signal the launch of a long and aggressive cycle of interest rate cuts." "What the market wanted from Jerome and the Federal Reserve is that it is the beginning of a long and vigorous cycle of interest rate cuts in China, in the United States. European Union and in other countries of the world, "said Mr Trump. "As usual, Powell has let us down, ending the quantitative focus that should never have begun."
"Jerome Powell wanted two birds to reduce their interest rates, but he did not hurt any of them …" It's the impression that s & ds Has been produced since last night between traders, bankers and market players, and that explains the strong division in progress, The decision was not welcomed and praised, but closed Wednesday's session, down from 1.23%. Powell added that this break would not be the beginning of a long series of cuts designed to support the economy despite the risks, including the weakness of the global economy. However, he refused to rule out a second cup this year … to keep the suspense suspended!

America

United States