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Editorial: Fed’s hinting at rate cut suggests shift in preparation for economic slowdown

  • June 22, 2019
  • , The Japan News , 07:28 p.m.
  • English Press

The United States has shifted its monetary policy stance in the direction of monetary easing. It is hoped that the country will steer the policy flexibly while giving consideration to market stability.

 

The Federal Reserve Board has signaled the possibility of an interest rate cut sometime soon.

 

In a statement released after the Federal Open Market Committee (FOMC) held a policy-making meeting, the U.S. central bank said, “Uncertainties about this outlook have increased.” It then made its stance clear, saying the committee “will act as appropriate to sustain the expansion.”

 

Concerns over a possible downside to the U.S. economy have grown due to trade friction between the United States and China, among other factors. The Fed’s intention to shore up the U.S. economy by shifting to a rate cut stance is understandable.

 

A notable point is that eight out of 17 officials at the FOMC meeting now expect one or two rate reductions this year. In March, no member was projecting any rate cuts by the end of the year.

 

This suggests that a sense of crisis has suddenly surged within the Fed.

 

Since May, interest rates have been slashed one after another in various countries, particularly in emerging economies. European Central Bank President Mario Draghi this week hinted at a possible rate cut soon.

 

If the Fed fails to show a clear stance of cutting interest rates, the dollar will continue to appreciate, turning into a headwind for U.S. exporters. The Fed may have had such concerns.

 

Look closely at prospects

 

A possible rate cut in July has already been factored into the market. There are also signs that market players are moving in anticipation of further U.S. rate cuts. It is imperative for the Fed to continue providing information carefully to prevent market confusion.

 

The Fed has lowered its economic assessment this time. Still, U.S. stock prices have been at record high levels. If speculative money pours into the market due to the monetary easing, that could fuel an economic bubble. The economic outlook must be watched more carefully.

 

U.S. President Donald Trump has repeatedly criticized the Fed for increasing rates four times last year, as well as criticizing Fed Chairman Jerome Powell’s qualifications. It is concerning that the relationship of trust between the government and the central bank in the United States has been shaken.

 

In the first place, it is the Trump administration’s protectionist trade policy that has heightened the uncertainty of the global economy. Questions have been raised over Trump’s remarks, which appear to shift the blame onto the Fed.

 

For Japan, a further strengthening of the yen may be a source of concern. Depending on the U.S.-China trade talks and monetary policies overseas, pressure on the yen’s appreciation could intensify.

 

At a press conference, Bank of Japan Gov. Haruhiko Kuroda said, “We will consider additional easing without hesitation” if circumstances require. However, the BOJ has already carried out large-scale easing measures.

 

Besides there being little room for additional easing, concerns about the side effects of the policy are growing. Such policy management may be difficult. The Japanese central bank is urged to exercise wisdom and implement effective measures.

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