Will Fed’s ‘preemptive’ rate cuts succeed in sustaining business?

The Yomiuri ShimbunThe U.S. Federal Reserve Board’s aim to preemptively avoid business deterioration is understandable. It is essential that the Fed evaluate the effect of its interest rate cuts and ensure that they lead to sustainable growth.

The FRB has decided to lower rates for the first time in about 10½ years, with its key interest rate to be reduced by a quarter of a percentage point to a target range of 2.00 percent to 2.25 percent per annum.

Personal spending, which accounts for about 70 percent of U.S. gross domestic product, has been robust while the real-term GDP for the April-June period expanded by an annualized 2.1 percent over the previous quarter. U.S. stock prices have hovered at their highest levels.

Despite that, the Fed has decided on preemptive interest rate cuts based on its assessment that concerns about future economic prospects are rising.

Fed Chairman Jerome Powell cited the weakening of the global economy and trade friction as reasons for the rate cut decision during a news conference.

The administration of U.S. President Donald Trump has put off the invocation of its fourth round of punitive tariffs against about $300 billion worth of Chinese products. If this is implemented, it will impact the world as a whole. Washington and Beijing should seek to find a middle ground to avert the invocation.

As Powell told the press conference that the Fed decision “is not the beginning of a long series of rate cuts,” disappointment has prevailed in the market and stock prices have plunged.

There is a possibility that financial markets will be hit by wild fluctuations due to speculation over additional rate cuts. The FRB must work toward disseminating information in detail to prevent confusion from arising.

Pay heed to risks

Trump has repeatedly demanded that the FRB lower interest rates. He should refrain from making such remarks, as they sway financial markets. He seems to lack awareness that U.S. financial policies exert influence globally.

Awareness of the risks caused by rate cuts must not slacken.

The ratio of the outstanding debt of U.S. firms to the GDP has already exceeded the level recorded in the aftermath of the 2008 collapse of Lehman Brothers. Rate cuts will make it easier for businesses to procure funds. If flagging firms increase their debts without careful consideration, it is feared that they will be unable to repay them in the future, and the debts will thus become nonperforming loans.

Interest rate cuts have been carried out one after another globally. This will increase the possibility of speculative money flowing into real estate and high-risk financial products. It is imperative to bolster monitoring for signs of a future economic bubble.

A matter of concern for Japan is the impact on the yen’s strength. Big Japanese businesses and manufacturing firms assume an average exchange rate around the level of ¥109 to the dollar. If the yen becomes stronger against the dollar following an additional U.S. rate cut, it may suppress the performance of export-oriented companies.

The Bank of Japan has decided on a policy to “take an additional monetary easing step without hesitation” if it becomes necessary to do so. It can be expected that the policy will have an effect of easing the pressure of a stronger yen. It is imperative for the central bank to study specific additional easing steps so as to be able to deal with business fluctuations flexibly.

(From The Yomiuri Shimbun, Aug. 2, 2019)Speech


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