Geoff Zochodne talks to FP columnist Kevin Carmichael about the Fed’s first rate cut in a decade and where it goes from here.

What were the reasons behind the Fed rate cut?

There were two main reasons:

  1. The Fed is rather uncomfortable about what is going on in the global economy – the trade wars are weighing on global growth. Other Central Banks across the globe are lowering rates, and lowering the US rate is an insurance cut.
  2. Inflation is below the 2% target. Lowering the interest rate can help move the US economy to the inflation target. 

This rate cut was not unexpected. Does the tone suggest there will be more rate cuts to come?

The Fed gave itself room to maneuver. It wants to sustain the expansion, the numbers are finally finding their way down, the low unemployment rate shows that a larger group of people are finally benefitting from the stimulus that the Fed has put in over the past decade. 

There’s no obvious pressure points in the economy that suggest a bust is coming. Everything is moving along at a moderate pace and the Fed would like to see that growth continue.

This wasn’t a unanimous vote. Was there a disagreement between committee members?

The data is strong overall, and it does not show a need to lower rates. There were two votes against the rate cut, therefore they believed the policy was alright as it was. By lowering rates you do risk inflation. 

Trade wars are playing on the weakness in the global economy and the weakness in investment. There is not enough data to know how this will effect the economy in the long term. This uncertainty leads to a risk management approach to monetary policy. 

Was there any information in the decision that the Bank of Canada might draw on for their decisions?

This was expected, there was not a lot of new information. The Fed is ultimately responding to outlook for the global economy. There is a lot of monetary stimulus in Canada and the Bank of Canada does not need to respond the way the Fed does. However, if the Fed goes through with a second cut, the Bank of Canada may have no choice but to make another rate cut. 

Source: Financial Post