Central Bank Doves: Fed Takes Additional Insurance, PBOC Reluctantly Trims

Central banks took center stage last week with a mixed bag of activity. Some delivered as expected. Some surprised. There were no rate hikes, a few cut rates and a few did nothing. The U.S. Federal Reserve (Fed) took out additional “insurance” against a slowdown in the economy, while the Peoples Bank of China (PBOC) reluctantly lowered its new lending rate although it may have been too small to have a major impact on the economy.

The Hong Kong Monetary Authority cut interest rates for the second time this year following the Feds decision.

U.S. Federal Reserve

The Fed cut its benchmark interest rate 25-basis points as widely expected for the second time since July, as concerns grow about a potential global economic slowdown. Policymakers also left the door open for another rate cut this year if the economy weakens further although the market isnt sure if it will come in October or December. Traders want to see two more cuts this year.

“We took this step to keep the economy strong,” said Fed Chair Jerome Powell.

Policymakers have been sharply divided over whether to hold or continue to gradually reduce rates as the US economy presents a mixed picture. Not all Federal Open Market Committee members were on board for the move however. Boston Fed President Eric Rosengren and Kansas City Fed President Ester George voiced concerns that the U.S. economy isnt in need of an extra boost from rate cuts. However, St. Louis Fed President James Bullard favored a deeper, 50-basis point cut.

Peoples Bank of China

The PBOC cut its new one-year benchmark lending rate for the second month in a row on Friday. The move was designed to gain control of borrowing costs and support the economy as the U.S.-China trade dispute drags on.

The Loan Prime Rate (LPR) was cut 5 basis points to 4.2%, the second time it has been trimmed since it was revamped in August, and days after the central bank‘s latest reduction in banks’ reserve requirements took effect.

The move was far less than the rate cuts by the Fed last week and the European Central Banks (ECB) the week before, suggesting Chinese officials remain reluctant to join the other major central banks in implementing aggressive stimulus measures due to worries over mounting debt.