DWS: Trump influences Fed policy

Comment by Christian Scherrmann from DWS

"The Fed remains true to itself. Once again, it lowered key rates by "only" by 25 basis points to a target corridor of 1.75%-2.00%. And once again, its reasons included subdued inflation as well as risks resulting from weaker global growth and various trade conflicts, justifying another insurance cut. In that sense at least, President Trump has certainly influenced central bank policy.

The latest economic forecasts by central bankers barely moved. The growth forecast for 2019 has even been raised by a tenth. Only when looking out ahead to 2021 did the Fed see a need to cut its growth forecasts. However, there was a little more movement in the so-called "dot plot", in which FOMC members give their individual assessments of how key interest rates will develop in the medium term. On average, the central bankers are not currently signalling any further moves in interest rate in 2019 and 2020, at least according to their "dot plot".

More stunning was the development of interest rates on the refinancing markets for short-term liquidity in recent days. Interest rates for short-term money jumped sharply. A number of reasons were cited by traders, some of them quite nervous. The Fed itself was surprised, even as it claimed that such developments would have no implications for monetary policy. More liquidity has already been and will be provided in the future. The decision to lower the overnight deposit rate more than the usual 25 basis points to 1.80% from 2.10% was purely technical, Powell said in the press conference. Whether the markets will follow this assessment remains to be seen. Ultimately, we interpret the decision positively, including the fact that not all voting members of the FOMC agreed on the rate cut. That is exactly what you might expect of an independent central bank in uncertain times.