Donald Trump got less than he wanted. Wall Street was unimpressed. Both the White House and the financial markets see the first cut in US interest rates in more than a decade as a taste of more to come. And they are right.
Announcing its quarter-point cut, the Federal Reserve said the decision was warranted by global developments – shorthand for Trump’s trade wars – and muted inflationary pressure. The idea is that this is an insurance policy against the risk of a possible recession.
But that line of argument is going to fool nobody. There is an argument for pre-emptive action to prevent the longest expansion in US history coming to an abrupt end but the Fed doesn’t really buy it.
Instead, there are three reasons why interest rates are coming down and none of them reflect that well on America’s central bank or the man in charge of it, Jerome Powell.
Reason number one is that the Fed got it wrong when it raised rates last December and now admits as much. This cut is an attempt to rectify that mistake.
Reason number two is that the Fed has been under relentless pressure from Trump to cut rates and has now buckled under the strain.
Reason number three is that Wall Street will crash without a fresh injection of cheap money. Share prices have reached record levels only because the markets have been banking on a Fed rate cut. When Powell threatened to cut off the supply last year, Wall Street went cold turkey.
The Fed has now managed to get the worst of all possible worlds. Cutting rates by half a point would have looked decisive and forward looking. As it is, Powell has only managed to make the Fed look reactive and a soft touch. Neither the White House nor Wall Street will be satisfied with this modest easing of policy and will pile on the pressure for another rate cut in the autumn. Financial markets can always detect weakness and the Fed under its current leadership positively reeks of it.
Intu eyes radical change
The consumer is keeping the UK economy afloat amid all the Brexit uncertainty but you would never know it looking at the £856m first half loss posted by the shopping centre firm Intu.
On the face of it, things should be looking up for the owners of some of Britain’s biggest malls. Wages are rising faster than prices so living standards are on the up. As the latest Lloyds Bank results show, households are still reaping income windfalls from the mis-selling of PPI ahead of the late August deadline for making claims. And with unemployment at its lowest level in more than 40 years, consumer confidence is robust.
But none of this really matters to Intu, which has fallen victim to the revolution in retailing that has seen more and more spending migrate online. Deep structural change means consumers no longer operate the way they did as recently as two decades ago. The digital economy has tipped the balance of power in favour of buyers at the expense of sellers. In a classic example of what the economist Joseph Schumpeter called “creative destruction”, prices have come down and retail failures have gone up.
Has Intu been slow to wake up and smell the coffee? It’s hard to disagree with Fidelity Personal Investing’s Emma-Lou Montgomery when she cites “old fashioned” relationships with tenants, too much debt and a management team that’s “not agile enough” as three reasons why the company is struggling.
The new chief executive, Matthew Roberts, says “radical transformation” is required, always an admission that serious mistakes have been made in the past. Part of the plan involves converting surplus retail space into houses. That makes sense, because there is more demand for residential property than there is for retail floorspace. It is radical. But it won’t be easy. And it won’t come cheap.
