Fed's George Warns Rate Cut Could Lead to Bubbles and Recession

Galtero Lara
May 16, 2019

The Federal Reserve is sure to keep interest rates on hold Wednesday - and also for the near future - for not cutting prices, as President Donald Trump maintains up his attacks on the Fed.

The move in expectations could put additional pressure on the Fed to cut its interest rate target or otherwise signal a looser monetary policy.

The campaign was unpopular with many of Trump's fellow Republicans, who said it would cause a surge in inflation. At the time, the US insisted its unconventional monetary-policy actions were aimed exclusively at restoring domestic growth.

Stocks to the Dow and the S&P 500 are both up 0.4%.

The US and China have been fighting a trade war since a year ago, placing billions of dollars worth of tariffs on one another's goods.

The controversial choice for the Federal Reserve board of governors of president Donald Trump issued a statement in a moment of Fed officials declaring they would keep a rate unchanged supporting his own nomination.

"China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing", Mr Trump wrote on Twitter.

"You can not game what two leaders.are going to do from day to day", said Anthony Saglimbene, global market strategist with Ameriprise Financial Services in Troy, Michigan, of the high-stakes standoff between Trump and Chinese President Xi Jinping. "In any event, China wants a deal!".

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The president later told an audience in Louisiana that "with a little quantitative easing" USA growth would hit 5%, referring to the Fed's emergency bond purchases following the 2008 crisis.

Those wagers have gained traction with the escalation in trade tension between the world's two largest economies. The U.S. has long complained about other governments applying political pressure on central banks and argued that Fed policy is driven by domestic economic priorities rather than any global competition.

The Fed's quantitative-easing campaign helped drive down the value of the dollar, provoking accusations from Brazil and other countries that the USA was waging a currency war on the rest of the world. The central bank raised rates four times in 2018, but markets now are pricing in a rate cut as soon as October.

A further complication for the Fed: The inflation outlook among USA consumers dipped sharply in April, countering Fed policymaker hopes that inflation dynamics will improve and the pace of price increases soon rise toward their target level.

In earlier tweets, Trump insisted that he will only accept a "great deal" for the U.S.

Trump had moved to reassure markets on Tuesday, saying the USA has "a dialogue ongoing" with China. The US administration is also considering a 25% tariff on another $300 billion worth of Chinese imports, which would cover nearly all the imports from China to the United States.

Trump's remarks on Tuesday come amid market volatility spurred by uncertainty over the direction of the talks and how long they might continue before a solution is reached.

The New York Fed reported that the public's expectations of future price rises declined to the lowest level since 2017.

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