2019-08-03_The_Economist

TheEconomistAugust 3rd 2019 57

1

I

nterest ratesset by the Federal Reserve

have been rising since 2015. The gradual

approach, explained the Fed’s chairman,

Jerome Powell, last September, was intend-

ed to leave time to see how well the econ-

omy could absorb each raise. “So far the

economy has performed very well, and

very much in keeping with our expecta-

tions,” he said back then.

Now America is being treated to what

some are calling “Powell’s pirouette”. On

July 31st Mr Powell announced America’s

first interest-rate cut in over a decade, of

0.25 percentage points (see chart). At the

press conference after the announcement

he blamed weak global growth, trade policy

uncertainty and muted inflation. “We’re

trying to sustain the expansion,” he said.

The move was widely expected, though

not universally understood. By many mea-

sures America’s economy still seems buoy-

ant. After dipping a little, earlier in the year,

consumer confidence is almost back to its

post-recovery peak. Figures published on

July 26th revealed that Americans are still

spending enthusiastically. Some recent

risks have subsided, notably those to do

with the public finances. On July 22nd poli-

ticians agreed on a deal to raise America’s

debt limit, and to avoid steep spending

cuts. According to Oxford Economics, a

consultancy, had they failed, the squeeze

could have knocked 0.4 percentage points

off real gdpgrowth.

But businesses do not appear to share

consumers’ confidence. Non-residential

investment shrank in the second quarter of

the year. Residential investment has fallen

for six consecutive quarters. According to

the Federal Reserve Bank of New York, in-

vestors are pricing government debt at a

level that has historically been associated

with a one-in-three chance of a recession

within 12 months.

President Donald Trump’s trade war

shows no signs of abating. The effects of

the latest increase in tariffs, in mid-June,

will take a few more months to become

fully apparent in the data. On July 18th the

imf updated its World Economic Outlook,

citing “subdued” global growth and a “pre-

carious” projected pickup in 2020. More-

over, some of the economy’s recent resil-

ience may have been in the expectation of

the cut to come. Financial conditions have

become looser since January, when Fed of-

ficials first signalled that they would be

pausing interest-rate increases. Mortgage

rates have also fallen since then.

Finally, as Mr Powell emphasised on

July 31st, inflation is uncomfortably weak.

On a measure that excludes volatile food

and energy prices, it sagged to 1.6% in June,

well below the Fed’s 2% target. That has

paved the way for members of the Fed’s

rate-setting committee to adjust the path

of interest rates downwards and to imple-

ment an “insurance cut”—a tactical reduc-

tion intended to keep the expansion alive.

With interest rates so low, there is little

Monetary policy

Turning point

WASHINGTON, DC

The Fed cuts rates for the first time in over a decade

Comeback act

Sources: Bureau of Labour Statistics; Federal Reserve

UnitedStates,%

1985 90 2000 10 19

0

Recessions 10

Unemployment

rate

Federal funds

target rate

2

4

6

8

Finance & economics

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