In a widely anticipated move, the Fed chief cut the interest rate by 25 basis points which was largely in line with expectations. The US market soon sold down rather quickly and viciously with the Dow Jones Industrial Average (DJIA) losing more than 300 points.
Was it because Powell did not go for 50 basis points? What if it was the first rate cut in more than a decade?
He could have gone for 50 basis points and the markets would still have corrected heavily simply because investors were not interested in the Fed chief’s decision. That, to investors, was past tense. Investors were spooked by the future that Powell painted.
More specifically, what did he mean by “the move to ease the cost of borrowing was to insure against risks washing onto American shores from abroad”. He then added that he remains confident in the US economy and that he sees no sectors ready to go bust.
When the markets started to react violently, incurring the wrath of his boss, Powell clarified by saying, “Let me be clear. I said it’s not the beginning of a long series of rate cuts. I didn’t say it’s just one or anything like that.”
Oops! Someone is angry!
Since it is not the beginning of an easing cycle, then what was this rate cut for? To please his boss, I would assume. That was the reason for Powell claiming that the cut was simply a hedge against possible risk and nothing else. And why the need to clarify by putting out a teaser for another cut in the future?
I have been rather vocal against this rate cut for the simple fact that the US economy does not need one – at least not at this moment. The US economy is strong and healthy. It does not need a dose of antibiotics. Trump needs a reality check.
Meanwhile, the trade talks lasted for half a day with little to offer. It ended on a “constructive note” and nothing else, but Trump decided to draw the ire of China by threatening to impose 10 percent tariffs on the remaining US$300 billion worth of Chinese goods!
Investors who have been scared off by Trump’s flippant comments are still on the sidelines. The meddling of the affairs of the US Federal Reserve will sideline others. If Trump wants a strong stock market to please investors by cutting interest rates, it will be risky for the long-term health of the US economy; if Trump wants lower interest rates to fight the trade war, China can follow suit.
Be prepared for a volatile August.
Gabriel Gan was a Senior Vice President at AmFraser Securities. He left to join DMG Securities (now renamed as RHB Securities) to take on a similar role. During his stints at the stockbroking firms, he dealt in equities, performed advisory role and executed corporate finance deals for his clients.
Since 2001, he has been invited by the media (both Mediacorp and SPH) for his stock market opinions. On radio, he spoke on 95.8FM for more than a decade; he now speaks every Wednesday and Thursday mornings on SPH radio 96.3 FM, delivering his opinion in Mandarin. On TV, Gabriel appeared on Channel NewAsia, the former Channel U and various Channel 8 financial segments including Good Morning Singapore, Hello Singapore and MoneyWeek. On print media, he continues to give quotes and comments on the economy and stock market for Lianhe Zaobao, Lianhe Wanbao and Shinmin Daily. On top of that, Gabriel was a columnist for the now defunct My Paper.