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1 Aug 2019

International Economy

Fed Lowers Policy Rate, But the Baht Weakens Against the Greenback (Current Issue No.3012)


             ​As expected, the Federal Reserve (Fed) slashed its policy rate for the first time in over 10 years to a range of 2.00-2.25 percent at its meeting, July 30-31, 2019.   However, no signs of another policy rate cut have been seen from the Fed Chair. The outcome of the latest FOMC meeting has disappointed investors and financial markets globally as they were expecting the Fed to be more dovish. Meanwhile, the Baht weakened to approximately THB30.85/USD, August 1, 2019.

            We at KResearch view that the Fed's decision to lower its policy rate was intended to signal to the markets that its action was to preempt risks to the US economy only. It also wanted to calm market expectations towards the likelihood of further policy rate cuts. In addition, the Fed's action reflects “the important roles of the Fed's monetary policy tools", in particular the Fed Funds rate, which have helped support the US economic growth, especially when fiscal stimulus tools from the White House are being stifled by many factors. Moreover, the impact of import tariff hikes amid the persistent US-China trade war is being felt on production costs, profits and operating results of the US business sector, which will in turn affect tax collection and fiscal position of the US, going forward.

            Looking ahead, KResearch views that it is likely that the Fed will make further policy rate cuts to sustain the economic performance during the remainder of 2019 and/or into 2020 because the US economy exhibits gloomy outlook and is plagued by a number of downside risks, in particular the US-China trade dispute and Brexit, which will likely result in increased volatility in the US Dollar and Baht. Regarding the Thai interest rate outlook, KResearch views that the Bank of Thailand may give more weight to domestic factors rather than the outlook of the Fed Funds. 

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International Economy