— This is the script of CNBC's news report for China's CCTV on August 1, 2019, Thursday.
After the fed's decision and fed chairman Colin Powell's speech, all three major Wall Street indexes closed down sharply overnight, down more than 1%, with the Dow closing down nearly 334 points.
The chart gives a better sense of the plunge in U.S. stocks as Powell spoke, with the Dow down 500 points. Meanwhile, the dollar index has rallied strongly, pushing it to its highest level in nearly two years, but the price of gold, the haven and inflation - resistant asset, fell nearly 1. 5%, VIX gained 15.64%, so we can see the volatility in financial market.
Typically, the fed's decisions and the fed chairman's public statements try to avoid causing excessive market volatility, in that sense, Powell clearly failed to stabilize the market, and he has failed to satisfy President Trump. This fully reflects the embarrassment of the Fed, and Powell in particular, and raises some questions about its independence. As the first rate cut by the Federal Reserve in more than a decade, this one is also very special. For one thing, it comes only seven months after the last time the fed raised interest rates.
In the short period of seven months, the fundamentals of the US economy have not deteriorated significantly. On the contrary, key economic indicators, including GDP data, employment-related data and so on, all look good. The latest core PCE data also shows that inflation is picking up.
Then, in this case, is it necessary to cut interest rates to stimulate economic growth? The vote, which two members voted against, was 8-2, the biggest split at the fed since December 2017. Powell himself does not seem particularly confident in the face of this divide.
In his speech, he interpreted the rate cut as a "medium-term adjustment" and said it did not mean the Fed was entering a cycle of rate cuts, but added that there was no single cut. The main reason for its ambiguous position is the lack of internal fundamentals to support the rate cut. The fed's explanation for cutting interest rates and stopping its contraction early was that global trade tensions and the world economy were slowing, and that US inflation remained below target. Is this explanation convincing? Supporters and opponents have their own arguments.
Janet Yellen，Former Chair of the Federal Reserve
"I think in light of the risks, I would be inclined to cut a bit. I wouldn't see this as the beginning, unless things change, of a major easing cycle."
While former Federal Reserve chair Yellen has publicly supported a rate cut, Howard Marks, founder of Oak tree capital, one of the country's most influential fund managers, dismissed the move as unnecessary and possibly counterproductive. He said cutting interest rates to delay a US recession could end up pushing the country into a worse one.
But in any case, the Fed's previous hints about rate cuts have had a direct impact on global markets. More than 20 central Banks around the world have cut interest rates since April.
The fed's decision came on the same day that the central bank of Brazil and three other central Banks in the Middle East cut interest rates. Amid global interest rate cuts, emerging market assets are already showing signs of overheating, and that, in turn, will put pressure on the fed to ease further. For now, the odds of another fed rate cut in September are just 51.9%, but more than 80% by December, according to data from federal funds futures trading.
The mixed signals from the fed also make it harder for central Banks to make decisions about interest rates, how will the Bank of England respond on Thursday be the next focus.