Us federal reserve reacts to trade conflict: interest rate turnaround in the usa

The U.S. economy is weakening due to the trade conflict with China. Now the U.S. Federal Reserve has responded by lowering interest rates. For Trump, that’s not enough.

Oil prices have already fallen – the world market reacts to Powell’s announcements Photo: reuters

For the first time in more than a decade, the U.S. Federal Reserve Fed lowers interest rates again. In explaining its decision to cut the key interest rate by 0.25 percentage points, the Federal Reserve (Fed) referred primarily to the trade conflicts instigated by Trump, which are slowing global economic growth. In particular, the trade dispute between the U.S. and China, the two largest economies, threatens to slow the economy.

"The uncertainty driven by trade issues was greater than expected," Fed Chairman Jerome Powell said in explaining Wednesday’s rate cut. The key interest rate is now in the range of 2.00 to 2.25 percent. It was the first interest rate cut since the global financial crisis around a decade ago. The widely expected turnaround in interest rates initially left the stock market cold, but should give the markets and the U.S. economy new momentum in the medium term.

The decision is a hedge to ensure that global risks do not slow further growth in the U.S. economy, Powell explained. The central bank also signaled the possibility of further interest rate cuts. The point is to "act appropriately" to "sustain" the decade-long upswing in the U.S. economy, Powell said. He made clear, however, that the rate cut would not be the beginning of a "long series of cuts." The Fed’s next interest rate meeting will be in September.

With the rate cut, the central bank also accommodated its most prominent critic – President Donald Trump. For months, he has been publicly expressing harsh criticism of the central bank’s course and calling for significantly lower interest rates. At times, he has described the Fed as "completely clueless. But the current measures do not go far enough for the president. On Wednesday, he was angry on Twitter that Powell had once again "let the U.S. down" because no further measures were promised. The markets had hoped that this was the "beginning of a long and aggressive cycle of interest rate cuts," Trump said. This was needed to strengthen U.S. competitiveness, he said.

Subdued oil prices

Asked if Trump’s criticism played a role in the central bank’s decision, Powell said, "Political considerations never play a role for us." The central bank chief also stressed that they were not criticizing Trump’s trade policies, they were simply trying to factor in their consequences for the U.S. economy.

Oil prices fell the following day. A rather tight monetary policy tends to have a dampening effect on oil prices because it can dampen economic growth and thus demand for crude oil. In addition, the dollar strengthened after the Fed decision, making crude oil, which is mostly traded in dollars, less affordable for investors from other currency areas.

After the devastating global financial crisis in 20, the Federal Reserve had aggressively cut interest rates to stabilize the economy. In 2015, it began gradually raising the key interest rate again. As recently as 2018, there were four rate hikes.

The prime rate, known as the federal funds rate, is the rate at which commercial banks borrow money overnight. A reduction in the interest rate makes loans cheaper, which is why companies can invest more easily and many citizens have to spend less on debt service and thus have more income available.

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