While the US-China trade war dominated May and June, the attention shifted to the Fed’s rate cut decision in July. The attention has been magnified by President Trump repeatedly attacking the Fed as well as Fed Chair Jerome Powell. President Trump accused the Fed of not doing enough. He even tried to remove Powell from the helm. Recently, President Trump posted a warning on Twitter. He said that “a small rate cut is not enough.”
Fed’s upcoming rate cut decision
If the Fed cuts interest rates on Wednesday, it will be the first time since 2008. Economists and analysts expect a rate cut by 25 basis points. Some analysts want a higher rate cut. They want the Fed to cut the rates by 50 basis points. President Trump would likely be in the second group. Morgan Stanley (MS) has a similar view. On Monday, a top economist at Morgan Stanley said that a rate cut by 50 basis points is necessary due to the weak business environment in the US.
So far in July, the S&P 500 (SPY) has gained 2.4% despite trade and Fed uncertainties. On Wednesday, the index was almost flat at 11:49 AM ET, while Nasdaq (QQQ) was 0.28% higher. Apple (AAPL) drove the market with 4.3% intraday gains during the same period. On Tuesday, Apple reported better-than-expected revenues and earnings.
Does the Fed have a rationale for a big cut?
President Trump and others expect a big rate cut. However, the economic rationale behind a cut is mixed. On one hand, the employment rate remains near the highest level in five decades. Recently published consumer confidence data for July also sounded upbeat. On the other hand, inflation remains below the Fed’s target. Also, the trade war hasn’t been resolved yet. On Tuesday, President Trump lashed out at China. In a tweet, President Trump said that “China is doing very badly, worst year in 27.”
Powell has maintained his composure despite the pressure that President Trump and the markets have put on his shoulders. The Fed will release its decision in a few hours. Will Powell stay strong or will he give in to President Trump’s demands for a big cut?