Yields fall before expected Fed rate cut

The world economy is at risk of a recession in the wake of a bruising trade war between the US and China. Image Bloomberg

The world economy is at risk of a recession in the wake of a bruising trade war between the US and China. Image Bloomberg

"Another rate cut from the Fed to try to shield the USA economy from global headwinds", said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

Citing the global economic outlook and "muted" inflationary pressures at home, the central bank chose to lower interest rates a quarter of a point to meet a target borrowing rate of 1.75% to 2%. That could disrupt some of the brightest spots in the USA economy: hiring and consumer spending.

The current figure of $1.4tn in bank reserves held at the Fed appears large, but much of it is tied up because of regulatory and liquidity requirements, according to analysts.

The divisions on the policy committee underscored the challenges confronting Chairman Jerome Powell in guiding the Fed at time of high uncertainty in the U.S. economy. "No guts, no sense, no vision", the President fumed.

New projections showed the median estimate by policymakers is for rates to stay within the new range through 2020.

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The breakdown of the split "suggests most Fed officials still see a rebound in economic growth as their base case scenario, which means any further rate cuts would be limited", it wrote in a note to investors.

However with the cut largely priced in already, the direction of the USA dollar following the announcement is likely to be determined by the bank's forward guidance and the chances of further monetary easing. It also suggests that Wall Street is struggling to absorb the record sales of Treasury debt, which is being used by the Trump administration to fund a swelling United States budget deficit.

In economic projections released on Wednesday, Federal Reserve policymakers said they expect the economy to grow 2.2% this year, faster than they forecast in June.

Yet no one, perhaps not even the Fed, is sure of how interest rate policy will unfold in coming months. Too many uncertainties exist, notably the outcome of Trump's trade war.

Powell said policymakers do not expect a recession, but trade uncertainty is creating "cross winds" that are weighing on the economy amid President Donald Trump's conflict with China.

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Federal Reserve Bank of St Louis President James Bullard wanted a more aggressive half-point cut, while Boston Fed President Eric Rosengren and Kansas City Fed President Esther George preferred to leave rates where they are, and not cut at all.

Which way the Fed might go from here is far less clear cut. Powell has said that the policymakers remain focused on sustaining the expansion and keeping prices stable without regard to any outside pressures.

At a news conference Powell is holding Wednesday, he will likely be asked about the risks facing the economy, including the attacks on Saudi oil production facilities, which sent oil prices surging and could raise inflation expectations. But the Fed gave mixed signals about what may happen next.

Inflation is projected to be 1.5 per cent for the year, below the Fed's 2 per cent target, before rising to 1.9 per cent next year.

The most serious threat to the expansion is widely seen as Trump's trade war.

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In recent days, the Trump administration and Beijing have acted to de-escalate tensions before a new round of trade talks planned for October in Washington. Bank of America fell 1%.

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