On the 31 July 2019 2.00pm (EDT, US), the FED decided to cut interest rates by 25 basis points from a range of 2.50 – 2.25 per cent to 2.25 – 2.00 per cent.
There are a few key points on why this decision was reached. These include:
- Continued trade war tensions between the US and China is creating further uncertainty for US companies. This ongoing uncertainty is making some companies more cautious about their capital spending.
- Core inflation (excluding energy and food prices) has been steady at around 1.6 per cent over the last 12 months. This is below the FED’s target of 2.00 per cent inflation.
- Wages are seen to be steadily rising, but not at the rate that can put upward pressure on inflation to reach the 2 per cent target.
Additionally, the Chairman of the FED Jerome Powell stated that this rate cut is a “mid-cycle adjustment to policy” and that this “is not the beginning of a long series of rate cuts”. These words dampened market expectations of a number of reductions over the next six months or so.
In response to this announcement, the Dow Jones at 2.00pm was at 27,211 points and then dropped to finish the day at 26,860 or a drop of 1.3 per cent. Further, the $US/$A exchange rate weakened to 0.6830 cents on the back of a strengthening $US.
The Australian market has also dropped today (11.00am, 1 August 2019) by a more modest 0.3 per cent. Gold stocks in particular fall sharply (around 5 per cent). The question arises whether the Reserve Bank Board may now take a more cautious approach to cash rate reductions going forward.
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