Face of Nation : Global stocks have fallen following comments from senior US Federal Reserve officials, which dampened excitement about an aggressive rate cut as early as July from the world’s most important central bank.
Fed Chairman Jerome Powell and St. Louis Federal Reserve Bank President James Bullard on Tuesday pushed back on market expectations and presidential pressure for a significant US interest rate cut of half a percentage point as soon as its next meeting.
Powell said the central bank is “insulated from short-term political pressures”. But he said he and his colleagues are currently grappling with whether uncertainties around US tariffs, Washington’s conflict with trading partners and tame inflation require a rate cut.
The pan-European STOXX 600 index fell 0.3 per cent to its lowest level in a week, while Germany’s Dax was down 0.15 per cent.
The MSCI world equity index, which tracks shares in 47 countries, was down 0.16 per cent, while US futures indicated a flat to lower open.
The dollar rebounded and gold prices retreated after Powell’s comments which pulled the dollar up from three-month lows against a basket of other currencies in the previous session at 95.843. It was up 0.1 per cent at 96.273.
Equity markets have rallied this month in anticipation that Fed policymakers would cut rates, but Powell’s remarks cast doubt on those expectations when he referred to the Fed’s independence.
According to latest data from CME Group’s FedWatch program, federal funds futures implied that traders now see a 27 per cent chance of the Fed lowering rates by half a percentage point in July, compared to 42 per cent on Monday.
However, not all see the comments as evidence of a policy u-turn. Richard Dias, multi asset strategist at Pictet Asset Management, said the Fed had effectively backed itself into a corner, making a cut in July or September highly likely.
“They are in a weird dichotomy, so many cuts are priced in and the market has rallied on this news and the bond market has rallied so if they don’t deliver what they have telegraphed, their credibility will be impinged,” he said, adding that he expected a cut of 25 basis points.
“They would never do 50 bps, we are not in a recession,” he said.
