Image source: Irochka © 123RF.com
On Wednesday the Federal Open Market Committee of the US Federal Reserve decided to lower the federal funds rate by 25 basis points. Thus, the rate was lowered from 2.0 per cent to 1.75 per cent.
Market analysts and economists anticipated this decision as the economic situation, both in the US and also globally, has made little headway since the FOMC's previous meeting in September.
The observance of muted inflationary pressures was cited as the primary reason for the Committee’s ultimate decision.
“On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed. […] In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.”
The decision to lower the rate seeks to foster a more accommodative environment for the economy to grow by stimulating higher rates of fixed business investments and exports.
Therefore, the success of Wednesday’s decision is going to be weighed against the development in those two economic aspects in the mid-term, through the first quarter of 2020.
The steady growth in exports has been impeded since the second quarter of this year, as the ultimate resolution of the trade war has become even more uncertain.
US EXPORTS. Image source: TradingEconomics.com
The net exports need to surpass the recorded performance in Q1, chiefly in March, for the FED to be able to recognise any discernible change for the better.
In relation to fixed business investments, the FOMC expects that the decision to lower the interest rate would stabilise investors’ confidence and therefore support sustainable growth in fixed investments.
The ISM Manufacturing PMI rose slightly in October from the decade-low in the previous month; however, the index would have to register a marked improvement before the policy of the FOMC could be deemed successful.
US Business Confidence Index. Image source: TradingEconomics.com
The US dollar fell following the release of the decision, despite the expressed optimism by some of the Committee’s members
The EURUSD appreciated by 0.35 per cent on Wednesday, and thus, the price started forming a new bullish impulse swing after last week’s correction.
The price is expected to continue appreciating towards the resistance level at 1.12087, which is the 61.8 per cent Fibonacci retracement.
EURUSD 1D Chart. Image source: Trendsharks ©, created with TradingView.com
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