FED Cuts Rates, USD Gains Against EUR

The Expected Move

                On Wednesday the US FED cut interest rates in a widely expected move by market and experts. The cut was the second this year – previously FED made such move in July for the first time since 2008. The decision was supposed to aid sustain the economic expansion that goes for the record-long period. However, the FED gave not a lot of hints on whether rates will be cut again and if yes, then when. Interest rates were cut by 25 basis points, from 2% to 1.75% with voting in the committee 7-3. Policy makers were not seeing eye to eye in taking the decision. The division within the FED is further observed in cut rates projections. Seven out of 17 policymakers foresee one more cut this year, also at the level of 25 basis points. But five of them actually sees the rise by the end of the year. There is a huge discrepancy between the gentle and more bold approach of the US policy makers. Still the FED chief Jerome Powell hinted that more steps are on the way.

Other Decisions

                The FED made other important decisions. It changed two key rates in order to keep its main policy on track: lowered the interest payed for excess bank reserves to 1.8% by 20 basis point and set its offering rate at 1.70%. Interest payed on bank reserves is now 20 basis points below the maximum level of target range. Whereas the offering rate that is used for operations like repurchase agreements is now five basis points below the minimum level of the target range – the new one set for policy rate. The offering rate is used for instance in 2.2 trillion dollars repo transactions.

Forecasts for Economy

                When it comes to predictions for the economy, not much has been changed. The GDP growth is predicted to be a bit higher than 2.2% in 2019, whereas the unemployment rate is said to be at 3.7% until the end of 2020. Inflation is supposed to be at the level of 1.5% for this year, which is quite lower than the goal of 2%. Next year the inflation is predicted to rise to 1.9%.

Why the Cut?

                FED policymakers stated that the  interest cut is due to global risks that are spread by trade war with China and the economic slowdown around the world. The FED wants to balance the need for lower rates against the risks of cheaper money causing consumers borrowing too much. That happened before the financial crisis in 2008.

The Market’s Reaction

                Ahead of the FED statement the US stocks were low, but after it they further fell. Whereas the 10-year Treasury yield edged higher to 1.79%. The US dollar exchange rate reacted with gains – both against the euro and the Japanese yen. The USD traded close to the level of seven-week high against the yen. On Wednesday mid-day it traded at 108.35 yen, up 0.2%. The seven-week record high is 108.37. In terms of the exchange rate against the euro, the USD fell by 0.3% to 1.1031 dollars. The index measuring the USD exchange rate against the basket of six major currencies went up by 0.1% to 98.49 points.