The Federal Reserve cut rates by a quarter point today, and what a disaster! Did you see what the U.S. dollar did? Ugh!
What a disaster! The idea for a rate cut was to push the value of the U.S. dollar down because our exports and industrial sector has slowed over the last few years as other countries central banks keep devaluing their own currencies. The situation has become so dire that President Trump has routinely blasted the Fed for hiking rates which push up the U.S. dollar.
The main reason the Fed cut a quarter point was to stop the U.S. dollar from running away from other currencies. Just the opposite happened today! Why? The Fed rate cut wasn’t enough to devalue the U.S. dollar relative to other currencies around the world. The rate cut of a quarter point may have just been wasted beyond we might get a little bit of a rate cut on our credit cards and loans but I doubt it will amount to much. The Fed can’t afford to be wasting rate cuts because that leaves them with less ammo during the next recession.
President Trump said today after the Fed rate cut: “What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world. As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place – no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!”
At the very least, to get the maximum value out of a rate cut, Powell should have made it sound like more rate cuts were coming. Instead, by calling it just a “mid-cycle adjustment” (meaning an adjustment in a larger rate hiking trend), Powell shot himself in the foot and we completely lost any benefit from the rate cut in terms of being a drop in the value of the U.S. dollar.
President Trump perfectly called that one. He was right by saying the Fed should not have hiked rates last year. He was right by saying the Fed needed to do something bigger than a quarter point. We know he’s right because what the U.S. dollar did today in response to the rate cut.
At the press conference today, Powell said a phrase that caused markets to drop -400 points in a matter of minutes, the phrase was “mid-cycle adjustment”. Powell told everyone not to think of today’s move as a new accommodative policy stance of rate cuts from here on out. Instead, think of this as just a mid-cycle adjustment which implies that the Fed may only cut a couple of times before hiking again inside a larger rate hike trend. Here’s the part of Powell’s press conference where the market plunged like -400 points:
I’m concerned by what the future holds for the U.S. economy. Clearly the way the market responded to today’s quarter point rate cut shows that the Fed is not as in command of the economy and markets as most traders thought. It’s sort of beginning to look like the Fed is behind the curve and being dragged along like a petulant child.