Dovish in the dark, Fed promises more cuts

The Fed’s decision to cut rates is a result of its worries about a weakening US labour market than confidence that inflation will align itself to its 2% target

The US Federal Reserve on Wednesday announced its first interest rate cut after Donald Trump became president for the second time. The notes from the Federal Open Market Committee (FOMC) meeting suggest that there could be more than one rate cut over the rest of the year. The latest rate cut comes in an environment where there is considerable economic uncertainty and outright political hostility facing America’s central bank. Trump has been berating the Fed and its governor for not bringing down interest rates sharply — something he did after Wednesday’s decision as well. To be sure, Trump’s last-minute nominee to the FOMC, Stephen Miran, dissented (he wanted a 50-basis points rate cut against the Fed’s 25), though his demand too was significantly smaller than Trump has been calling for. This suggests that Trump’s rhetoric is just that rather than thought out policy. The Fed’s decision to cut rates is more a result of its worries about a weakening labour market in the US than confidence that inflation will align itself to its target of 2%. In fact, most analysts agree that the full impact of the Trump tariffs is yet to be seen in the inflation numbers and expect them to also cause headwinds in the labour market.

The Fed’s action should be seen as a leap of faith in the dovish direction even though there are considerable economic unknowns as far as the macroeconomy is concerned. (Bloomberg)

The Fed’s action should be seen as a leap of faith in the dovish direction even though there are considerable economic unknowns as far as the macroeconomy is concerned. To be fair, the economic environment and even the inflation-unemployment trade at the moment is not something that can be easily managed by vanilla-style monetary easing or tightening. Monetary policy of the world’s largest economy will be closely observed for its efficacy and independence in the near term.