FLASH: Fed policy makers reportedly are being forced to cut interest rates because of the European Central Bank’s much-lower policy rate.
If losing demand to Europe weakens US growth and threatens to push inflation too low, US rates also must also fall.
“The ECB’s policy rate, at minus 0.4%, is already nearly 3 percentage points below the Fed’s. And last week ECB President Mario Draghi strongly hinted it will soon go further into negative territory. Fed officials have concluded they cannot permit U.S. rates to deviate too far from their foreign counterparts’. So even though the U.S. economy is in much better shape than Europe’s, the ECB is helping to force the Fed’s hand,” the Wall Street Journal reported Wednesday
The Fed now is factoring not just foreign economic developments, but also foreign interest rates into where US rates ought to be.
“If one central bank raises rates and another doesn’t, capital pours into the first country, pushing its currency up and putting downward pressure on inflation, exports and economic growth. In the other country, the opposite occurs. These dynamics are why other countries often follow the Fed. This year, though, the Fed is a follower, not just a leader,” Noted WSJ.com.
To be sure, quarter-percentage-point lowering of borrowing cost will not assuage President Trump’s increasingly strident demands for the central bank to ease monetary policy.
Tuesday, President Trump called for a large interest rate cut, he blames the Fed under Chairman Powell for undercutting his administration’s efforts to boost economic growth and bring on a recession.
Fed officials hope Wednesday’s rate cut will lower the odds of a recession by helping to boost tame inflation at home and offset risks from slowing growth abroad and rising tensions with trading partners.