Economics & Markets

US interest rates cut for the first time in over 10 years

By Diana Mousina
Economist - Investment Strategy & Dynamic Markets Sydney Australia

The decision by the US Federal Reserve to cut interest rates by 0.25 per cent at the end of July marks the first interest rate cut in the US for over 10 years.

As a result the US federal funds rate — which affects the loan rate for households and businesses — has fallen to a range of between two and 2.25 per cent.

The reason for the adjustment came down to the fact that US growth has weakened over the past year, predominantly due to the trade wars President Trump has been engaged in with other countries, most notably China.

Other contributing factors are the weakness we are now seeing in the US manufacturing industry with factory orders deteriorating as higher trade tariffs take their toll, and the weakness in capital expenditure by businesses in the US.

Inflation is also continuing to undershoot the US Fed’s two per cent target and has been doing so now for over six months.

A cycle or a one-off?

Factors supporting the US economy include a strong labor market with low unemployment and a recent pickup in household spending, and these could go some way towards explaining why US Fed chairman Jerome Powell characterised the cut as a mid-cycle adjustment.

Mr Powell indicated that while the latest move should not be viewed as the “beginning of a long series of rate cuts” he qualified this statement by adding: “I didn't say it's just one rate cut.”

The outlook

However, despite some strength in the US economy, we expect another US interest rate cut to come in September, and perhaps also a further one towards the end of the year or early in 2020.

Given that the trade war has now ramped up again between the US and China with more tariffs imposed on Chinese imports it’s likely that some of the US data will continue to weaken over the near-term, and we do expect US interest rates to move lower over the next six months.

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Diana Mousina, Senior Economist
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