Market news | 7 August, 2019

The Federal Reserve cuts rates for the first time in ten years

Diego Balsa Portfolio Manager

The global economic deterioration forces to lower the reference rates

The global economic downturn has once more obliged the U.S. Federal Reserve (Fed) to change its monetary policy and begin to cut its official rates.

The US monetary authorities have cut 0.25% official rates in the largest world economy, placing the price of money in the range 2.25% – 2.00%. It should be noted that among the members of the Fed there were two opposites for a decrease in official rates, since, like many economists, they consider that the necessary conditions are not given to change monetary policy.

This is the first rate cut of the last decade (since 2008), and occurs in a context of economic expansion (specifically the longest period since 1850 without registering a recession), and low unemployment (the unemployment rate it is located in the area of ​​historical lows).

The main reasons for lowering the reference rates are fears that there will be a strong global economic slowdown (as some leading indicators point out), as well as the Trump administration’s commercial tensions with different regions, especially with China.

Precisely the president of the United States requested before the meeting of the members of the Federal Reserve that the rates be lowered, although he requested an even greater decrease than they have finally made (of at least 0.5%). A decrease that allowed to maintain the pace of growth of the economy and gave support to the financial markets.

He was not the only one, as many investors expected a half-percentage point cut, or at least for the Fed to open the door more clearly to a further drop in official rates in September. Dissatisfaction with a less expansive Fed than some expected is being reflected in the price of the variable income, an asset that is being heavily penalized in recent days.

Nor has it helped calm the mood of investors to increase tariff tensions between the United States and China.

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