Cutting interest rates and yet inadvertently tightening monetary policy is a trick few central bankers would be proud of pulling off. This week, the US Federal Reserve managed it. The Federal Open Market Committee delivered a quarter-point cut in rates, its first reduction since 2008. But the remarks from Jay Powell, the Fed chair, in the subsequent press conference seemed to convince investors that the cut was an anomaly.
The financial markets duly undertook a sharp correction, with traders reducing the number of further cuts expected in the medium term, equities falling rapidly and the yield curve inverting further. It seems unlikely that Mr Powell intended this reaction, and his communication skills as Fed chair are still a work in progress. But the Fed’s task at the moment is not easy. It has to contend with a US president perennially injecting uncertainty into the US economy with destructive trade policy and continually sniping at the central bank, and with investors who may have got ahead of themselves in pricing in a series of cuts.
Whether the economy really needed an interest rate cut can be debated. Growth slowed in the second quarter as net trade and business investment — both affected by Donald Trump’s trade war — weakened sharply, while consumption grew rapidly.