What to Watch Out for as the Fed Makes Another Rate Cut

In August, the Federal Reserve decided to slash rates by 25 basis points. Now traders expect another rate cut

This will be a busy week. And it started before the week began after a series of bombings happened in Saudi Arabia. As a result, the price of crude oil rose by 15% when the markets opened today. Trump also announced that the US was locked, loaded, and ready to attack the aggressors.

Analyze and Make Decisions on Crude Oil

While the Houthi rebels claimed responsibility, the US immediately blamed Tehran for the attacks. Meanwhile, China released weak economic data that showed a slowdown in retail sales, fixed assets investments, and industrial production.

The Federal Reserve

The Federal Open Market Commission (FMOC) will start its two-day meeting on Tuesday. The meeting will follow the one in August, where the bank decided to slash rates by 25 basis points.

In this meeting, the stakes will be higher because of what traders are expecting. There is some consensus that the Fed will slash rates by 25 basis points, which will bring the total amount of rate cuts to 50 basis points.

Last month’s rate cut was the biggest since the 2008 crisis.

In the previous months, growth in the United States has seen some weakness as companies pause on making investments. They are worried about the rising cost of doing business as the Trump tariff bites.

Further, with the recently-announced tariffs of Chinese goods, consumers will likely continue seeing increased costs when they go shopping, In addition, the demand of some American products like soybeans has crashed, which has led to surging cases of bankruptcies in middle America.

Why Trump Cannot Win a Trade War With China

 

The meeting comes at a time when Donald Trump has increased his pressure on the Federal Reserve to slash rates. Just last week, the president said that the Fed should bring interest rates to zero or below in a bid to weaken the dollar.

5 Ways Traders can Benefit From a Weak Dollar

 

This statement came after the European Central Bank (ECB) announced that it was slashing interest rates and restarting QE. However, there are concerns that lower rate cuts will be worse for the economy.

In an editorial, billionaire Ken Fisher said:

Cutting short rates alone isn’t adequate. It’s still low-interest-rate tight money. As Europe shows, lower than low doesn’t get it on. European negative short rates force Europe’s banks to charge savers for deposits. You wanna be Europe? Cutting further hurts, doesn’t help, creating even less lending and slower growth.

Just last month, Trump sent a strong-worded tweet asking who was a bigger American enemy between China’s Xi Jinping and Jerome Powell, the Fed chair he appointed.

He deleted the tweet after receiving increased criticism even within the republican party. On his part, Jerome Powell has blamed the weakness in the economy on the tariffs the president has put on China.

The meeting comes at a time when the US and China are gearing up for a meeting that will happen in the coming month. Last week, the Trump administration announced that it was extending the tariffs on fresh Chinese goods by two weeks.

China responded by removing tariffs on important products like soybeans and pork. Previously, China had removed tariffs on 16 categories of goods.

The chart below shows the performance of the US dollar index this year.

us dollar index 2019

 

The Fed will not be the only game in town this week. The BOE will also release its rates decision. The BOE is expected to leave interest rates at 0.75% this week. This is as the country goes through a crisis on Brexit as Boris Johnson appears to be cornered.

Other useful external resources

Global central banks are in a rate-cutting frenzy – Businessinsider

Don’t expect the Bank of England to follow the ECB’s monetary fireworks – The Telegraph

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