President Donald Trump (left) will be eyeing Federal Reserve chair Jerome Powell's rate cuts decision tomorrow. Photo / Getty Images
President Donald Trump (left) will be eyeing Federal Reserve chair Jerome Powell's rate cuts decision tomorrow. Photo / Getty Images
For all his big talk and wild tweeting, Donald Trump doesn't have control of the US economy - and it drives him crazy.
As will be clear tomorrow morning, the real power to steer global economic direction rests with the US Federal Reserve - the equivalent of our Reserve Bank.
The eyes of all the world will be on US Fed chair Jerome Powell early tomorrow (NZT) as he makes what is expected to be the first cut to US interest rates in a decade.
The market has priced in a minimum 0.25 per cent cut to US rates, said ASB senior economist Mark Smith.
The US Federal Funds rate sets the trend for global borrowing.
It has climbed slowly back from a global financial crisis low of 0.25 per cent to the current level of 2.5 per cent.
There has been some expectation that the Fed might go further tomorrow and cut by 0.5 per cent, but in the past few days that has been dialled back, Smith said.
The odds on a half per cent cut were now less than 20 per cent.
The big focus will be on the words and tone Powell chooses to assess the US economy and any clues they hold to the interest rate path from here, Smith said.
Markets have already priced in further cuts, so anything that signalled a pull-back from that position would cause stock and currencies to move.
Of one thing we can be sure, though - the Fed won't do nearly enough for Trump.
It is far more costly for the Federal Reserve to cut deeper if the economy actually does, in the future, turn down! Very inexpensive, in fact productive, to move now. The Fed raised & tightened far too much & too fast. In other words, they missed it (Big!). Don’t miss it again!
Conversely, of course, most of the world's economic thinkers have been pleasantly surprised by Powell's performance and resolute defence of orthodox monetary policy.
He, like most of the world's central bankers, had pushed hard to lift rates back towards more normal pre-GFC levels.
But a global economic slow down, driven in part by Trump's trade war with China, has stalled the rising-rate path.
That had been a catalyst for the rate cuts, Smith said.
"It started to slow from the middle of last year but the Fed continued to normalise rates, to put them up, as it thought the US economy was doing well."
But at the start of this year there was an "about turn" by the Fed when it called time on further rate cuts.
Since then further signs of slowing global growth had pushed it towards this first cut.
"Combined with that we're not seeing any signs of inflation coming through anywhere," Smith said.
That had removed any pressure for higher rates - for now at least.
The reserve banks of Australia (RBA) and New Zealand (RBNZ) have both cut rates this year.
Reserve Bank Governor Adrian Orr. Photo / File
The RBNZ is widely expected to cut for a second time at its meeting next week - which would take our official cash rate to a record low of 1.25 per cent.
"Rates are certainly headed for the bottom," Smith said.
That global trend was also creating a race to the bottom for currencies.
"Normally currencies move for a lot of reasons, but at the moment it certainly seems the central banks are having quite an influence."
Lower rates lower the value of a nation's currency - which can boost export performance.
But the value of currency is relative. They can't all fall at once.
The US dollar had picked up a bit as expectations of dramatic rate cuts have been dialled back, Smith said.
Maintaining a relatively low Kiwi and Aussie dollar was likely to remain a big factor for the RBNZ and RBA in the coming months as they set their rate paths, Smith said.
