The inventors of World Savings Day had probably not imagined that: Just to the annual date, which was created to promote the saving, the US Federal Reserve on Wednesday lowered the key interest rate again. Commercial banks are likely to follow suit soon. The loser is the small investor, who receives no significant income for his savings on the account account or even soon pay. The signal is clear: Stop saving!
The stock market took the third interest rate cut this year with the bored reaction of a child ripping one pack at a time from the wrapping paper. The prices rose, but no trace of euphoria. Eventually, traders had priced in the 25bp cut to a range of 1.5 to 1.75% long before the central bankers' meeting. That's why the Fed could not help but deliver - otherwise it would have plunged the financial markets into turmoil. Market chaos in addition to the real economic risks, but can Fed Chairman Jerome Powell not at all.
Watch Chair Powell's statement from the #FOMC press conference:
Intro clip: https://t.co/3YA0jsnNNB
Full video: https://t.co/7w7757bBky
Press Conference materials: https://t.co/XfnK6vmAPI
Powell, the world's most powerful central banker, is a driven one: the markets and the US president, who has made the economy his playground for reelection. Powell said Wednesday at his press conference that the Fed is not planning any further cuts this year - unless things turn out differently. "If there are developments that lead to a significant change in our forecast," explained the central banker, "we will respond appropriately". Translated, this means that if the trade war between the US and China escalates again or if the US economy does lose its grip, the central bank will act again.
One number - different interpretations
Anyway, Powell can not really please anyone. The one (Trump), the interest rate cuts go not far enough. The others fear that politicians will shed their powder too soon and without necessity. Two members of the Open Market Committee, which takes monetary policy decisions, voted against yesterday's cut in interest rates.
Opponents of easing argue that the US economy is still doing pretty well in the eleventh year of recovery. Unemployment is at a 50-year low, wages are rising, and gross domestic product has solidly expanded at an annual rate of 1.9 percent in the third quarter. The plus is significantly weaker than the Trump government has promised, but a dream value from the perspective of Europeans.
How different one can interpret the number, Trump has demonstrated. "The greatest economy in American history," he commented Wednesday morning. When the quarterly growth during the tenure of his predecessor Barack Obama had reached 1.9 percent, Trump had put it quite differently: "The economy is in deep trouble," he tweeted in the spring of 2012.
Trump has it easy: his rating is purely politically motivated. Fed-boss Powell, on the other hand, is handling factors that he has no control over. He does not just have to deal with the fact that the president virtually escalates the trade war with China on a monthly basis, sometimes blowing it off. But also with the fact that the economic data in the small print are now confusing. While consumer demand is - still - flourishing, the picture visibly darkens among companies.
Many US companies have frozen their expansion plans. In the third quarter, investment in machinery, factories and the like fell at an alarming three percent annual rate.
"The reduction of short-term interest rates will have absolutely no effect"
Some economists doubt that the rate cut can do much to stimulate the economy. "The reduction in short-term interest rates will have absolutely no effect in helping the depressed industry in this country," explains Bernard Baumohl, chief economist of the Economic Outlook Group. "The problem of American factories is not high credit costs." In a survey by the National Association for Business Economics among business economists in October, only about a third of respondents favored monetary easing. At the same time, two-thirds of commodity producers said their business was under duty.
Similarly, Aldis Birkans, chief financial officer of National Bank Holdings. Half a percentage point of interest more or less makes no difference to small businessmen who were concerned about Chinese imports because of the punitive tariffs. "You will still not invest in an area where the profit may be erased," the banker recently explained. The decisive factor is the uncertainty about the trade war.
Column on the topic
At the same time, the interest rate cuts by the Fed would have another, unwanted effect, Birkans warned: The profitability of banks is sinking - and that could reduce their willingness to lend. That in turn would hit hard on some of the Americans who love consumption. With a total of over four trillion dollars, the US consumers are in debt. The average American has three credit cards, with outstanding debts of $ 6,500.
After all, these consumers are likely to benefit from interest rate cuts. They reduce home mortgage costs as well as loans for the new SUV or gutter repair. However, the effect is limited: After the first two Fed easing, the average interest rate of credit cards has fallen from 17.85 percent to 17.57, the financial services provider Bankrate has calculated. The monthly minimum payment decreased by one to two dollars.