1st US rate cut in a decade.

On 31 July 2018 the US Fed cut interest rates for the first time in a decade. Federal Reserve Chairman Jerome Powell said the first interest rate cut since the financial crisis was to “insure against downside risks.” The rate cut was a quarter basis points.

This year the Fed's interest rate expectations have changed from a steady tightening path to a holding pattern and now with this interest rate cut decision more cuts are expected before the year ends. Indeed the US interest rate futures have priced in three rate cuts this year - in July, September and December.

A lot of confounding signals are beneath the Fed's decision. The Fed's Independence recently has been under a lot of spotlight because of the political pressure from the Trump adminstration to cut rates. The Independence of the Fed has been the corner stone of the recent mainstream monetary economic thinking. The former Fed Chairs of the Board of Governor's including the likes of Bernanke, Yellen, Greenspan and Volker have penned an opinion piece in the Wall Street Journal articulating the importance of maintaining the Independence of the Fed. The Independence interpreted as the absence of political interference in the operation of monetary policy.

Normally an interest rate cut is initiated to stimulate a slackening economic environment. With the lowest US unemployment in 50 years and Wall Street at a record high, one wouldn't expect a rate cut at this stage but a counter argument can be made when considering some forward-looking economic indicators of the US which have recently dipped indicating that maybe a recession is imminent now than ever. In some OECD countries such as Germany, the GDP growth is now approaching the negative territory signally that a downturn is catching up on the industrially developed countries. The interest rate yield curve inversion is also indicating that a recession is imminent. An inverted yield curve means that investors expect interest rates to fall, which typically happens in an economic downturn. It usually tends to take some time for example 12 to 18 months.  Therefore the downside risks to future growth rather than the economy being already weak as indicated above influenced the Fed's decision.

An interest rate cut will raise the prices of various financial assets. This impact is noticeable especially when there is a policy transmission channel which impacts on the pricing of these assets. Therefore it is important for there to be a convergence between policy rates and the market rates. The US government can use the occurrence of low interest rates to raise cheap debt as they would be able to lock in these rates into the debt. The impact of the Fed decision on emerging countries and Africa could be long term investment portfolio reallocation in most cases to their detriment together with cutbacks in grants and aid in anticipation of a recession. It's been over a decade since the last global recession. On average recessions occur roughly after every 7 years hence this cycle post the last recession has been comparatively longer. This line of thinking assumes that the phenomena of boom and bust is still in existence.

The severity of the last Great Recession should inspire policy makers the world over to answer the question of whether lessons learnt of that crisis have been incorporated in how they manage macroeconomic cycles. It is important that macroeconomic policy making is not riddled with the politics and intellectual flaws of yester years.