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The Fed riding to the rescue again? That’s where the markets will be looking for support in the weeks ahead, because if Wall Street is to recover from these nasty few days, cheaper money will be the driver.
The Federal Reserve is now expected to deliver two quarter-point cuts to interest rates this year, with the first coming at its next meeting at the end of this month.
And if things really go haywire this week, I would not rule out a half-point reduction.
One of the things about markets is that surprises have more impact than fundamentals. So it was trouble at a couple of medium-sized US banks that spoiled the party, not fears the whole artificial intelligence-driven euphoria had got out of hand.
Everyone was wondering whether it was time to get out of big tech America – dangers of a crash there destroying what has been a remarkable bull market. But the shock came from a different quarter: boring old banking, not gee-whizz AI.
From a practical point of view this is good news. It gives the Fed a solid excuse for rate cuts.
Support: The Federal Reserve is expected to deliver two quarter-point cuts to interest rates this year
There already was one: a soft jobs market. Everything here in Washington is confused by the government cutbacks and now the shutdown. But as the Fed chair, Jerome Powell, acknowledged last week, employment growth is easing.
The Fed is usually said to have a dual mandate from Congress: price stability and promoting employment. Since inflation is more or less under control, a rate cut would help the latter.
It also has another, less well-known requirement, which is to promote moderate long-term interest rates, and that would fit in with rate cuts too.
Now, aside from the case for cheaper money to help fulfil the Fed’s mandate, there may well be the need to calm the markets.
We’ve seen it time and again. If there is panic, pump in money, or as they put it, supply liquidity.
Not a great idea in the long term. As we saw with so-called quantitative easing, you end up with more inflation. But in the short run that’s what you do.
I don’t think the markets are yet in full-on scare story mode. Some huge asset managers are still bullish. For example, Mark Haefele, chief investment officer at UBS Global Wealth Management, says: ‘We expect further gains for AI-linked stocks over the coming year.
‘Beyond AI, we see additional supportive factors for equities, including better-than-expected US economic growth and lower US interest rates.’
That may be over-optimistic. But as far as we can be confident about anything I think we can be sure that if current wobbles develop into something really nasty, the Fed will do its utmost to keep things under control.
What does all this mean for us?
Well, for a start, it is good news for Chancellor Rachel Reeves. We don’t have the freedom over monetary policy that the Fed has, and we have substantially higher inflation.
But the combination of worries about US banks and the likelihood that the Fed will cut rates has already reduced the interest payable on US government debt and, since these things go in kilter, also on the UK’s debt.
Our ten-year debt has been at a 4.7 per cent rate of interest for most of the past month.
On Friday it dipped below 4.5 per cent before climbing a bit in the afternoon.
By recent standards that’s still high, and it doesn’t make Reeves’ Budget numbers materially better. However, it is a move in the right direction.
More generally, we need a Fed that is seen to be competent within the US, and one that commands respect across the rest of the world. American money is so, so important. US stocks account now for more than two-thirds of the global total.
The Fed is under huge political pressure from Donald Trump’s administration – with the endless and frankly rather juvenile attacks on Powell from the President – and that is troubling.
We don’t know who will succeed him when he retires this spring, but we have to hope that the institution’s reputation remains solid.
My feeling is that the next few weeks will show that the US markets have been right to trust the Fed.
Fingers crossed that’s right.
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This article was originally published by a www.dailymail.co.uk . Read the Original article here. .