• The Fed lowers interest rates for the third time in a row

The Fed announced yesterday the third drop in interest rates in three months, nothing to do with market forecasts at the beginning of the year. However, the US-China trade war has disrupted all those forecasts and Donald Trump , with his continued expletives to the Federal Reserve and its president, Jerome Powell, has done the rest.

Why does Trump press and insult the Fed?

To try to explain it you have to look a little further. As of November 2020, when new presidential elections will be held in the US. Donald Trump knows that it is an evaluation of his four years at the White House and wants to make sure that the economic flank, his big bet, will not let him down.

The commercial dispute between Washington and Beijing is offsetting part of the benefits of the fiscal reform of January 2018, the effects of which have already been practically amortized by citizens and businesses. So Trump wants a weaker dollar to reinforce his exports and often repeats that high interest rates hurt the country's manufacturing sector.

"They have no idea," Trump wrote on Twitter on October 9, to blame the slowdown of the manufacturing industry on the inability of the Federal Reserve to cut interest rates faster to weaken the greenback. It is probably one of the most moderate things the president has said about the US central bank.

How has the Fed reacted?

It could be said that his endurance has gone from more to less. At first, the Federal Reserve seemed to mark the distances to the White House, however, the first signs of economic slowdown and the international context ended up making a dent in its strength and in July it lowered the price of money for the first time.

In September it carried out the second cut and yesterday the third, which leaves interest rates in a range between 1.50% and 1.75%.

Is the situation of the US economy bad?

No. Not much less. The analysts had a less vigorous growth at the beginning of the year than in the previous years, nothing they did not consider normal in the final part of the economic cycle in which we are. And the data points in that direction. The first official estimate of the country's GDP for the third quarter, published on Wednesday before the close of the Fed meeting, showed a year-on-year growth of 1.9%, one tenth less than in the second quarter but several above 1 , 5% predicted by analysts.

However, there are other macroeconomic data that drive experts away from catastrophism. As Lombard Odier collects, unemployment is around 3.5%, close to the minimum recorded in the last 50 years, the S & P500 index has grown 55% in the past five years and consumption levels are showing resistance.

In fact, consumer spending (+ 2.9%) - which accounts for more than two thirds of the country's economic activity - and the rebound in the real estate market (+ 5.1%) helped growth offset the fall in Business investment

So why does Powell yield?

His role is complicated. You should gauge the risk of falling short of the economic slowdown alerts or go over the stimuli in a context that many believe you do not need. "The president of the Fed will have to juggle, on the one hand, with the pressure of Donald Trump and the worsening of data from the manufacturing and services sector and, on the other, with the winds in favor of the cooling of tensions around the trade war and the postponement of Brexit. Difficult tessellation for Powell, "says Stéphane Monier, chief economist at Lombard Odier .

For Dave Lafferty , head of Market Strategy at Natixis IM , the Fed cuts rates "not because it is justified, but because it would be too painful for it to disappoint the market. At the same time, the Federal Reserve remains in a virtually impossible situation in which whatever you do will be criticized. "

Is there a risk of imminent recession?

No. "For now, there is little evidence that a recession is on the horizon. The US labor market is still strong, companies are not laying off workers and purchasing power and consumption remain. Although global growth is expected slow down below its potential in the coming quarters and offer more sober perspectives, it still does not mean recession, "Monier explains.

And now that?

It is one of the keys to Powell's speech: knowing what next steps the institution could take. "This new cut continues to reflect a preventive positioning before the gradual cyclical deterioration of the activity in a context of high global uncertainty. In view of the rest of the year, we cannot rule out an additional drop of 25 basis points in December, despite the Powell's words and the division of opinion among the members of the FOMC ", predicts Gonzalo de Cadenas-Santiago , director of Macroeconomic and Financial Analysis of the Mapfre Research Service.

According to the criteria of The Trust Project

Know more

  • economy
  • U.S
  • Donald Trump

Economy The refrigeration terminal of the Port of Castellón warns: "US rates lead us to close"

Tariffs Trump's tariffs threaten Spain: 400 million in oil and 300 million in wine

Companies Trump's victims speak: "They have sought to generate harm, touch our Achilles heel"