Section:GDN 1N PaGe:30 Edition Date:190801 Edition:01 Zone:S Sent at 31/7/2019 20:32 cYanmaGentaYellow
- The Guardian Thursday 1 August 2019
(^30) Financial
Business view
Larry Elliott
D
onald Trump got
less than he wanted.
Wall Street was
unimpressed. Both
the White House
and the fi nancial
markets see the fi rst cut in US
interest rates in more than a
decade as a taste of more to come.
And they are right.
Announcing its quarter-point
cut , the Federal Reserve said the
decision was warranted by global
developments – shorthand for
Trump’s trade wars – and muted
infl ationary pressure. The idea
is that this is an insurance policy
against the risk of a possible
recession.
But that line of argument is
going to fool nobody. There is an
argument for pre-emptive actionto prevent the longest expansion in
US history coming to an abrupt end,
but the Fed doesn’t really buy it.
Instead, there are three reasons
why interest rates are coming down
and none of them refl ect that well
on America’s central bank or the
man in charge of it, Jerome Powell.
Reason number one is that the
Fed got it wrong when it raised rates
last December and now admits as
much. This cut is an attempt to
rectify that mistake.
Reason two is that the Fed has
been under relentless pressure from
Trump to cut rates and has buckled.
Reason three is that Wall Street
will crash without a fresh injection
of cheap money. Share prices have
reached record levels only because
the markets have been banking
on a Fed rate cut. When Powellthreatened to cut off the drug
supply last year, Wall Street went
cold turkey.
The Fed has now managed to
get the worst of all possible worlds.
Cutting rates by half a point would
have looked decisive and forward
looking. As it is, Powell has only
managed to make the Fed look
reactive and a soft touch. Neither
the White House nor Wall Street
will be satisfi ed with this modest
easing of policy and will pile on
the pressure for another rate cut in
the autumn. Financial markets can
always detect weakness and the
Fed under its current leadership
positively reeks of it.Shopping and dropping
The consumer is keeping the
economy afl oat amid all the Brexit
uncertainty, but you would never
know it looking at the £856m fi rst
half loss posed by the shopping
centre fi rm Intu.
On the face of it, things should be
looking up for the owners of some
of Britain’s biggest malls. Wages are
rising faster than prices, so living
standards are on the up. As the
latest Lloyds Bank results show,
households are still reaping income
windfalls from the mis-selling of
PPI before the late August deadline
for making claims. And with
unemployment at its lowest level
in more than 40 years, consumerconfi dence is robust. But none of
this really matters to Intu, which
has fallen victim to the revolution
in retailing that has seen more and
more spending migrate online.
Deep structural change means
consumers no longer operate the
way they did as recently as two
decades ago. The digital economy
has tipped the balance of power in
favour of buyers at the expense of
sellers. In a classic example of what
the economist Joseph Schumpeter
called “creative destruction”, prices
have come down and retail failures
have gone up.
Has Intu been slow to wake up
and smell the coff ee? It’s hard to
disagree with Fidelity Personal
Investing’s Emma-Lou Montgomery
when she cites “old fashioned”
relationships with tenants, too
much debt and a management
team that’s “not agile enough” as
three reasons why the company is
struggling.
The new chief executive,
Matthew Roberts, says “radical
transformation” is required, always
an admission that serious mistakes
have been made in the past. Part of
the plan involves converting surplus
retail space into houses. That
makes sense, because there is more
demand for residential property
than there is for retail fl oorspace.
It is radical. But it won’t be easy. And
it won’t come cheap.Cutting rates by half
a point would have
looked forward looking.
As it is, Powell has
managed to make the
Fed look a soft touchFig-leaf US interest rate cut is
the worst of all worlds and
just makes the Fed look feeble
▲ The Fed chief, Jerome Powell, has
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