US Federal Reserve: Rate Cut “Warranted Soon”
US FEDERAL RESERVE – An interest rate cut “may be warranted soon,” according to St. Louis Federal Reserve president James Bullard.
A rate cut could be needed on the backdrop of rising risks to economy growth. Such risks have come from global trade tensions as well as weak US inflation.
Bullard is now the first Fed official to claim that the central bank may need to act upon recent events.
Bullard said that even though the Fed couldn’t react to every change in the ongoing US-China trade war, recent events have created “an environment of elevated uncertainty… that could feed back to US macroeconomic performance” as the world economy slows down.
He also added that the Fed “faces an economy that is expected to grow more slowly going forward, with some risk that the slowdown could be sharper than expected due to ongoing global trade regime uncertainty.”
A possible interest rate cut may also help boost inflation expectations and help squash fears that have emerged in the bond prices of a sharper-than-expected US slowdown.
Since the Fed’s last meeting, US President Donald Trump extended 25% tariffs to a bunch of Chinese goods.
He has also announced policies that are aimed at Chinese telecoms giant Huawei. These moves set off a sharp selloff in US stock markets.
Trump further shook the market when he said he would impose a set of increasing tariffs on Mexican imports to compel the country to tighten the control of its border with the US.
Wall Street Counting on the Fed
Meanwhile, traders are counting on the Fed to help them with Wall Street.
Expectations among investors that the US central bank will start slashing interest rates have grown, with the Fed funds futures indicating more than 50% chance of a rate cut announcement in July.
In May, expectations were lower than 20%. The change in expectations is widely considered to have something to do with the worsening trade relations and slumping stock markets.
Fed interest rate decisions have played a major role in the decade-long bull run of the stock market.
However, the swell in expectations for rate cuts could make the market vulnerable to any sign that the Fed is not going to pursue the matter.
In spite of Bullard’s comments, the S&P 500 finished the day 0.3% down.
Investors are awaiting comments from other Fed officials as well as Fed Chairman Jerome Powell’s speech on monetary policy at a Chicago conference.
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