Reaction mostly negative as US Fed cuts rates again

US rate cut is followed by Hong Kong one day later; most analysts see US cut as too little or ineffective in boosting the economy

Reaction to the US Fed rate cut on September 18 was mostly lukewarm as several analysts expressed skepticism over how effective the cut would be in boosting the US economy.

“The Fed’s rate cuts look rather old-fashioned compared to the European Central Bank’s (ECB) comprehensive package of easing measures last week. This simplicity could change soon, though, as the Fed’s toolkit for monetary policy proves increasingly ineffective against upward pressure on money market rates,” says Tim Foster, portfolio manager, fixed income, Fidelity International.

"This action has the potential to do more harm than good,” says Dr Kerstin Braun, president of Stenn Group, an international provider of trade finance. "Real capital growth and real economic activity are driven by long-term interest rates, which are functions of expected future inflation and investor confidence. That’s why a cut in short-term rates is unlikely to fuel business investment and manufacturing. Uncertainty around the global economy and the impact of the trade war has killed any appetite to invest.”

The US Fed cut rates by a quarter percentage point or 25bp on September 18, marking the second time this year and since 2008 that it has done so. The move came amid concerns over a potential global economic slowdown, with Hong Kong also following suit on September 19 by cutting its base rate by 25bp to 2.25 percent.

The federal funds rate will now be between 1.75% and 2%. Fed chairman Jerome Powell suggested in remarks that another rate cut could happen in the future though perhaps not anytime soon.

However, the decision was not unanimous among the Fed board with three out of the 10 officials dissenting. Two of the officials insisted that rate cuts were not needed while another one wanted a deeper cut.

While the US economy remains relatively strong with projections for growth being revised slightly upwards, concerns are mounting over an ongoing trade war with China as well as weak economic data from countries around the world, including in Asia.

Hong Kong faces its own serious problems due to an ongoing months-long protest movement which is likely to lead to a GDP contraction in the third quarter. The Hong Kong Monetary Authority (HKMA) made its 25bps rate cut on the day after the US rate cut, with HKMA chief executive Norman Chan warning of problems suffered by the retail, tourism and dining industries due to the protests.

US President Donald Trump criticized the rate cut, labelling Powell and the Fed as having “no guts” and “no vision” on Twitter. Trump wanted a deeper rate cut in order to help spur the economy.

Several analysts found the rate cuts were too little to have any effect or would even make things worse.

“Data out of the US has softened somewhat but inflation remains at or just below target, unemployment is tight, and wages are rising. The ‘uncertainty’ facing the economy is due largely to trade rather than a function of rates being too high,” says Peter Yiu, associate director, private client advisor, Charles Schwab Hong Kong.

“Attempting to trade around short-term news is a treacherous task; and though hope has emanated from anticipated trade talks in October and the delay of the October 1 tariffs, a comprehensive deal remains elusive. More broadly, sentiment around the world has also marginally improved. Yet, no major issues have been resolved and we believe there is heightened risk of volatility.”

“Looking ahead, we expect the Fed to cut rates twice more in the next 12 months – a marginally more hawkish forecast than consensus expectations for three cuts,” says Paul Hsiao, economist, global economic strategy, PineBridge Investments.

“We also expect yields on 10-year US Treasuries to trend around the current levels of 1.75%-2%. That would keep the important yield curve relationship at very flat, though not inverted levels, consistent with our forecast of slower global growth over the next year but not a recession,” says Hsiao.

However, other analysts believed that no more rate cuts would happen this year and that this would create investment opportunities.

“Chairman Powell’s cautious optimism on the economy should be a mild positive for equities in the near term, but this will be tested by the Q3 2019 earnings season that starts in October. In the medium to longer term, the possible slowdown in the global economy still points towards a greater emphasis in building portfolio resilience with corporate credits, hard currency emerging market debt and defensive equities,” says Tai Hui, J.P. Morgan Asset Management Asia chief market strategist.

“Bond investors will need to recognize the possibility that the Fed is not ready to cut rates continuously into 2020. This implies some rebound in short end yields is likely, especially if upcoming economic data remain solid. This could bring the US Treasury curve to bearish flatten. For Asian equities, high dividend equities are still an area where investors can find opportunities to build their portfolio to generate income,” says Tai Hui.

“Although I expected the 25bps cut today, I think that this may be the last cut for the rest of the year - the US economic outlook remains strong,” says David Chao, global market strategist, Asia Pacific (ex-Japan) at Invesco. “I have a strong bias towards risk assets especially in this easing monetary environment and in light of 1/3 of global fixed income products generating negative yields. Lower interest rates should cause investors to take greater risks and seek alternative asset classes that have higher returns,” says Chao.

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