Macroscope | Donald Trump won’t like it, but the Fed is keeping the US dollar strong with its rate cut
- The US Federal Reserve is cutting interest rates not for domestic reasons but in response to slowing global growth and Trump-induced trade anxiety. Effectively, it is creating space for other central banks to ease rates too
In a statement, the Fed said its decision on a second rate cut this year was driven by “the implications of global developments for the economic outlook as well as muted inflation pressures”.
In fact, at the press conference after the Fed’s meeting, Fed chair Jerome Powell pointedly said that the baseline scenario for the US economy remains “favourable” but that “since the middle of last year, the global growth outlook has weakened, notably in Europe and China”.
Since the Fed’s last meeting in July, it has “seen additional signs of weakness abroad and a resurgence of trade policy tensions, including the imposition of additional tariffs,” Powell said. In his view, “trade policy developments have been a big mover of markets and of sentiment during that inter-meeting period”.
From a currency perspective, such an explanation for the Fed’s rate cut might well lead investors to continue to prefer the US dollar to other currencies.