Sunday 21 July 2019 10:20 pm

Traders foresee small Fed interest rate cut

The US Federal Reserve is set to lower interest rates for the first time in nearly a decade when it meets at the end of this month, although there is confusion about the size of the cut.

Read more: ‘Faulty thought process’: Trump lashes out at the Fed

Market participants now think it is certain that the Fed will ease interest rates, according to a gauge from exchanges company CME Group which was updated today.

But the market thinks there is a 77.5 per cent chance that the cut will be 25 basis points, or 0.25 percentage points, while 22.5 per cent think the cut will be deeper at 50 basis points.

Hopes of a heavy rate cut were boosted last week by John Williams, the president of the New York Fed, who in a speech said it “pays to act quickly to lower rates at the first signs of economic distress”.

Yet the NY Fed soon rowed back on his comments, saying they reflected his academic research and did not indicate policy. This rare move steered markets back to thinking a smaller rate cut was likely.

An interest rate cut would make borrowing cheaper and encourage spending, which is likely to boost the economy.

The Fed raised rates from the post-financial crisis level of 0.5 per cent in early 2016 to between 2.25 and 2.5 per cent by the end of 2018, where they have since stood.

Earlier this month Fed chair Jay Powell gave a gloomy testimony to a congressional committee, warning that “trade tensions and concerns about global growth have been weighing on economic activity and the outlook”.

It was the latest in a series of moves that suggested the Fed was about to cut rates to keep the economy moving.

One person who would like to see a significant lowering of interest rates is US President Donald Trump.

On Friday Trump blamed a “faulty thought process” at the Fed for the fact that it has higher interest rates than other major central banks.

Read more: World markets rally amid growing expectations of Fed interest rate cut

He has long criticised Fed policy which he thinks is hurting the US economy. He has said the growth would “rocket” if rates were lowered.