Yesterday, Fed has finally released its highly anticipated statement to cut policy interest rates by a further 25 bps. It is the third consecutive cut by Fed for the first time in a long time.
Most experts, including me, had already agreed that the fed would cut rates by 25 bps. However, some of them believed that Fed could take more drastic measures if inflation rate would not turn out to be as expected. Anyway, Fed officials did not surprise me at all but they looked rather hesitant about their next move. Stating that Fed would slightly maintain negative real interest rate for now, Chair Powell has also implied Fed’s concerns about the fact that the is globally low.
As an economist, I do not believe that “0” interest rate or negative real interest rate will do any good to world economies. It would not be very realistic to think negative real interest rate will help boost savings and investments, especially given the fact that savings are the real source of investments.
Besides, near 0 interest rates can lead countries to face several liquidity trap-related risks. It’s a widely known fact that both technical and moral issues would arise in situations where people have a lot of money with low interest rates. By the way, proving my concerns, Powell said private sector’s debt pile hits record high because of low interest rates. Private Sector would not be very hasty in “creating value” as long as it finds the opportunity to borrow money paying a very low level of interest, which can lead first to a profit crisis and then to a GDP growth crisis.
I anticipated that the Fed would need some patience and time after this rate cut, as a message for those who expect rates to fall further down and down.
“A certain fact that Trump constantly fails to comprehend…”
Fed’s statement has given hints about the high possibility that they would follow a long-term policy. Even stating that Fed does not think about raising rates for the moment, Powell said rates would remain at a negative real level at least for a little while longer.
The fact that Fed decision turned out to be conforming to market expectations protected markets from sharp fluctuations. Although exchange rate EURO to US Dollar went up, their current level, which is above 11.1, is way higher than the 1.25 level that the duo has tested twice in the last 5 years. I wonder when Trump will get to understand that rate cuts won’t help dollar depreciate whatsoever.
Worried investors avoid too much of their money to get tied up in market, in which case it becomes very hard for parked dollars to flow into monetary and capital markets. Accordingly, the value of the dollar remains intact.