The US: a rate cut to come ?

The US: a rate cut to come ?

January 5, 2019 0 By Michel Santi

The US Federal Reserve, as we know, is in the process of “normalising” its monetary policy stance. That means it’s committed to gradually raising its guideline rates, after the extreme efforts during the finance crisis that led to quantitative easing. After increasing its rates four times in 2018, it has just announced two or three further increases set for 2019, mainly due to the excellent employment figures prevailing in the US.

However, the big slump in stock markets the last few weeks has meant that December 2018 was the worst since 1930 and that the NASDAQ (for example) fell 17.5% in Q4 of 2018. Combined with the Chinese and even the global economy slowed down, peppered with trade tensions brought on by the Trump administration … factors constituting pitfalls that could seriously call into question this upward spiral in interest rates. In truth, if these factors were to intensify, not only would the Fed stop hiking, but it would also be set to reverse this trend, which would mean it setting in motion a downward spiral on its base rates!

The US Federal Reserve’s history of decision-making is crying out for it, in fact, because it is littered with these abrupt and often spectacular U-turns of its monetary policy stance, kicked off in energetic and ambitious ways. It has thus gone from an increase in interest rates to a decrease – in only a few months – between March and July 1995, between June and September 1998, then between November and January 2001. Moreover, how can we forget the month of August 2007 when it announced real fears over the revival of inflationary pressure…to then lower its rates – and by 50 basis points! – the next month, in September 2007 ? It only actually needed one month to go from an upward bias to a downward bias, and this carried on until reaching absolute zero to then betopped off by a programme of liquid injections that gradually grew its balance sheet to 4.5 billion dollars ! But not without going through an intermediary period when, in summer 2018, it put itself in “rate rise” mode to – dramatically – change its tune in the autumn of the same year, with the help of an unprecedented credit crisis brought on by the fall of Lehmann…

So let’s not trust the statements and other minutes from the US Federal Reserve since they are not etched in stone. The Fed might, once more, likely to surprise those who are anticipating a series of rate rises this year. It is indeed this proactivity and this spirit of adaptation that make this central bank the most effective in the world. Bearing this in mind, let’s never forget the apathy and flagrant lack of credibility displayed by the European Central Bank that, under Trichet, raised its rates by 0.25% in July 2011, slap bang in the middle of Europe’s financial crisis. An utterly terrifying counter-example.