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Fed Enforces Rate Cut

Updated: Jul 31, 2019






As the US economic outlook turned volatile due to global and domestic conditions, The Federal Reserve Chair, Jerome Powell testified to Congress on Wednesday, July 10th, 2019, in which he stated that the Fed will cut the Fed rate and will choose expansive policies again. The ongoing trade war has pushed the US to raise tariffs and work its way around, hoping for a better wage growth, rising GDP, and better employment rate.  However, significant growth was not reached, with only a first quarter’s 3,2% rise in American GDP.  Growing uncertainties and the rising rate have made the American economy quite weak. Some progress was made at the G20 summit in Osaka, when the US and China have agreed to resume tradetalks, easing a long period that has contributed to global economic slowdown.


The decision to cut rates was made amidst some strains between the President of America, Donald J. Trump and the Fed. He stated in an interview that he disagrees entirely with what the Fed is doing, although the Fed is supposed to be independent. Trump even tried and failed to influence the Fed by appointing two of his supporters, Stephen Moore, and Herman Cain, to the Fed’s board. But both candidates were forced to withdraw amid scandals. Powell noted that the economy will perform reasonably well in 2019 with consumer spending rebounding in the second quarter after being weak in the first. However, Trump was uneasy with the raising rate that the Fed was doing, and repeatedly criticized Jerome Powell, reportedly even discussing firing him, even though Trump was warned by advisers that firing Jerome Powell is a disastrous move to make. Therefore, it seems that the decision to cut rates was a necessary, albeit controversial, as the economy needed more stimulus for a rebound.


After Jerome Powell’s congressional testimony suggesting that the central bank remained open to a near-term rate cut, the market index went high and S&P 500 crosses 3000 for the first time. It advanced 0,45% (13.44 points), and the energy sector leading gains as domestic crude oil price rose 4%. The Dow rose 0,29% (76.71 points) and came off high by market close. It reached a new record high of 26,983.4 points. The Nasdaq increased 0,75% (60.8 points). Powell suggested that uncertainties around trade tensions and the strength of the global economy continued to mire the central bank’s US economic outlook. So tax cut policy will be needed to increase money supply in America, which in turn will increase people’s consumption and indirectly affect the country's GDP.


Sources:

CNBC

Guardian

CNN


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