The Fed cut interest rates again by 25 basis points on Wednesday, continuing to stimulate economic expansion, but hinted that the threshold for further interest rate cuts will increase. The decision to cut interest rates was opposed by three voting officials, two officials called for no interest rate cuts, and one official wanted to cut interest rates by 50 basis points.
Powell believes that the US economy is good, and interest rate cuts are only for prevent current risks, including weak global growth and trade war risk. However, the Fed will rely heavily on data to make interest rate decisions on a case-by-case basis. When the Fed believes that it has done enough, the Fed will stop cutting interest rates.
Hawks interest rate cut action
The market believes that this week’s interest rate cuts are slightly hawkish. The median interest rate projections of the Fed policymakers show that there will be no interest rate cuts this year, although some officials hold different opinions. However, traders in interest rate futures still bet that there will be another 25 basis point cuts this year.
US consumption is the backbone of the global economy
There are more and more warnings about global economic activities. The German economy is under pressure from recession, and the Japanese economy is about to face the challenge of consumption tax. Personal consumption in China and India continued to decline, and Chinese auto sales recorded a year-on-year decline for 14 consecutive months. In the face of the downside risks of the global economy, why is the Fed still emboldened? The answer is consumption.
Consumption is the backbone of the US economy and even the world economy. US personal consumption expenditure reached 14.5 trillion, accounting for about 68% of GDP, and accounting for about 30% of global personal consumption. The total wealth of American households reached 108.6 trillion. The current low unemployment rate, average salary growth, and low savings rate make the US personal consumption expenditure higher than other countries.
Year-to-date, US consumption still maintains a strong trend. First, US gasoline prices have fallen sharply from 2018. As of September 9, a gallon of gasoline was $2.56, down 11.1% from the same period in 2018. Falling energy prices ease the burden on consumers and make more disposable income available in other consumer sectors. Recently, the Saudi oilfield may cause energy price shocks, but the US local shale gas supply can further increase production and maintain domestic supply.
The US home sales market is also showing signs of warming. With the fall in US 10-year bond yields, US home mortgage rates fell to their lowest level since October 2016. The current 30-year mortgage rate is 3.49%, down more than 1% from 4.54% a year ago. The decline in housing refinancing rates will not only benefit home sales, but also help consumers get more loans and increase consumption.